FX Options Insights
In the past 24 hours, certain currency pairs experienced a surge in strength, leading to a notable shift in FX market dynamics. Broader FX options saw their implied volatility hit record lows for 2025 before rebounding. The USD/JPY pair spearheaded this movement after breaking below the critical support level of 150.93 and dipping under 150.00. This shift caused the 1-month implied volatility to rise sharply from 9.3 on Wednesday to 10.85 by Thursday's London session. With key policy announcements from the U.S. and Japan scheduled for March 19 and the 1-month expiration already priced in, this spike gained further traction. However, as the spot price stabilized in the low 150s, moderate supply pressure pushed volatility back down to 10.35.
Meanwhile, the EUR/USD spot price climbed within the 1.04-1.05 range, triggering a rise in implied volatility. It later reversed course, heading towards significant FX option strike expiries near the mid-1.04s. Reduced option premiums attracted hedgers, particularly those targeting bearish strikes expiring post-German elections. On Wednesday, a 2-week 1.03 option traded at 7.35 euros with a notional value of 1.3 billion euros. The 1-month implied volatility rose from 7.0 to 7.6 on Wednesday, bolstered by the Fed's volatility risk premium, before touching a long-term low of 6.75 on Friday. Additionally, the 1-month risk reversal for EUR puts versus calls moved up from 0.4 to 0.6.
The GBP/USD pair also saw heightened activity ahead of the Bank of England's policy decision on March 20. Implied volatility for the pair jumped from 6.5 to 7.0 on Wednesday, with the 1-month expiry incorporating this event. Interestingly, the pair's implied volatility remains below its historical levels, underscoring its potential value.
Elsewhere, the AUD/USD curve showed a modest rise from longer-term lows on Wednesday but may struggle to sustain gains without a reversal in the spot price. Similarly, USD/CNH implied volatility experienced a brief uptick before returning to its long-term lows, with realized volatility expected to remain subdued within familiar ranges.
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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!