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Implied volatility across G10 FX markets has significantly decreased, reaching levels reminiscent of pre-Federal Reserve (Fed) announcements and long-term lows. This decline is indicative of a market environment that is effectively stalled due to a lack of realized price movements and influential macroeconomic catalysts. In the absence of a definitive factor to disrupt the prevailing trading ranges, options contracts are consistently losing value, leading traders to either remain on the sidelines or to adopt short-volatility strategies while they wait for a potential resurgence in market volatility.
In particular, the implied volatility for the EUR/USD currency pair is now targeting its lowest levels in the past year. Since the Fed's policy announcement on Wednesday, one-month implied volatility has plummeted over 1.0 to reach 6.4. Additionally, the demand for EUR call options is diminishing relative to put options. After the Fed's announcement, there has been increased interest in EUR call risk reversals (RKO's), which have seen their associated triggers added to an already substantial existing pool at the 1.2000 strike level. With little excitement in the market currently, upcoming expiries of large strike options may hold more influence.
Meanwhile, the Bank of Japan's (BoJ) recently expressed hawkish stance was unable to prevent a decline in USD/JPY volatility. One-month implied volatility has continued its downward trajectory following the Fed's actions, sliding from 9.8 toward new lows not seen since June 2024, currently at 8.35. The one-month expiry 25 delta risk reversals are now trading at new multi-year lows, indicating a preference for downside strikes over upside strikes, currently at 0.6.
For the AUD/USD currency pair, the one-month implied volatility stands at 7.8, nearing the lows observed in March 2024 and post-pandemic lows of 7.25. This situation is likely to attract value-seeking traders. The recent decline in spot prices from new highs in 2025 above 0.6700 down to the well-known 0.6600 support level has not been a catalyst for increased demand for volatility.
In contrast, GBP/USD implied volatility has experienced a rare uptick following the release of Friday's borrowing data, which served as a reminder of the UK's precarious fiscal condition. Downside options for GBP/USD have gained premium compared to upside options, resulting in a modest increase in implied volatility for this currency pair.
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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!