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The anticipated reopening of the U.S. government is poised to bring back crucial economic data releases, which are a lifeline for FX traders seeking volatility and insights into policy direction. The absence of significant FX volatility drivers has kept FX option implied volatility hovering near record lows for weeks. However, a shift is underway as buyers begin to re-enter the market, especially beyond the 1-month expiry mark, which now includes the highly anticipated December 10 Federal Reserve policy announcement.
Although realized volatility remains subdued and historical measures are still trailing below implied levels, the risk-to-reward ratio for taking long-volatility positions is becoming increasingly attractive. A prime example is EUR/USD 1-month expiry implied volatility, which has climbed 1.0 above last week's low of 5.25. Interestingly, there’s a slight premium on upside strikes over downside ones, hinting that upward volatility might be more likely.
Adding to the mix, approximately 7 billion euros worth of options are set to expire around the 1.1590-1.1600 range during Thursday’s 10 a.m. New York/3 p.m. GMT cut. This is likely playing a role in the current consolidation phase near those levels.
Meanwhile, GBP put spreads against both EUR and USD have gained popularity in recent sessions. These trades are designed for those betting on a gradual decline in GBP rather than a sharp plunge.
In the USD/JPY space, implied volatility has ticked up slightly this week, with the premium for JPY calls over puts holding steady at around 0.9 on the 1-month 25 delta risk reversals. Despite this, trading activity doesn’t yet indicate any panic-driven positioning for a sudden USD/JPY surge or an intervention-induced setback.
All in all, as data releases resume and key events approach, FX volatility might finally awaken from its slumber, giving traders the action they’ve been waiting for.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!