FX Options Insight
The FX market continues to consolidate within its established ranges, despite the elevated implied volatility. This highlights persistent risks and uncertainties stemming from U.S. tariffs and their effects on both the U.S. and global economies, further exacerbated by the recent strength in TWD and other Asian currencies. Additionally, ongoing geopolitical tensions between Pakistan and India remain a key concern. While USD/TWD has recovered half of its losses from Friday to Monday, the associated implied volatility and the persistent TWD call-over-put premiums in risk reversals reflect continued demand for volatility and downside protection, maintaining record-high levels.
The U.S. Federal Reserve is not expected to cut rates until July. However, overnight options suggest a slight possibility of increased actual volatility following Wednesday's announcement and press conference. GBP/USD overnight implied volatility has recorded its largest rise since the last expiry, factoring in the Bank of England's anticipated 25bps rate cut to 4.25% on Thursday.
EUR/USD options remain positioned for further FX appreciation, with trade flows and triggers indicating potential targets of 1.2000 and 1.2500 over the next 6 to 12 months. Risk reversals continue to show a long-term premium for EUR calls over puts, although slightly below mid-April and five-year highs—except for the 1-year tenor, which remains at its peak. Watch for significant EUR/USD strike expirations at 10 a.m. New York time on Thursday. For GBP/USD, 1 to 3-month expiry risk reversals have regained and maintained their highest premiums for topside strikes over downside strikes since Brexit.
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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!