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FX Options Insights 24/7/25
Implied volatility serves as an important indicator for assessing both current and future volatility risks. Recently, there has been a notable observation that, aside from a minor risk premium associated with the Federal Reserve's policy decision scheduled for July 30, implied volatility is experiencing substantial downward pressure. The current one-week expiry now captures the upcoming Fed decision, which has led to an increase in implied volatility for USD-related pairs against the primary G10 currencies by approximately 1.0 volatility point. This increase is particularly significant given the prevailing environment of decreasing volatility and the near-zero odds of a rate cut from the Fed. As such, any further realised volatility in the market is primarily anticipated to stem from the subsequent press conference held after the Fed's announcement.
As the week progressed, the broader landscape of implied volatility rapidly retreated, relinquishing many gains from earlier in the week. This decline coincided with the stabilising of FX spot markets amid a stronger appetite for risk and new highs in equity markets. The observed price dynamics suggest that the FX market is currently characterised by range trading in the short term, with volatility levels remaining muted. It appears that traders do not perceive an imminent threat of a sudden market breakout or abrupt shifts in price direction.
In terms of market sentiment towards the USD, a weaker dollar appears to be the path of least resistance based on the ongoing price movements and overall market positioning. Additionally, there is a growing tendency for demand and premiums to be skewed in favour of USD put options instead of calls across many major currency pairings. Notably, the EUR/USD sub-three-month risk reversals have rebounded by 0.4 this week, reflecting an increased preference for USD puts. Even though both realised and implied volatility levels remain low, market participants are seizing the opportunity presented by the calmness in the market to purchase inexpensive topside strikes, notably focussing on 6–12-month expiry USD put options with a strike price of 1.24.
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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!