.jpeg)
FX option implied volatility has been notably stagnant, hovering around long-term lows. This phenomenon can be attributed to a combination of subdued realised volatility and minimal perceived breakout risk, which has consequently kept demand muted within the market. However, recent developments, specifically the latest USD decline, have ignited newfound interest among traders, particularly focused on short-dated options for EUR/USD and GBP/USD pairs. The market, it seems, has been lacking in sufficient topside strikes, creating an opportunity for potential gains.
In the realm of risk reversals, there has been a sustaining tendency towards a topside bias. This trend underscores prevailing sentiment regarding the more vulnerable direction for the EUR/USD pair. Thus, when the USD experienced a drop, reaching new recent lows against the EUR, implied volatility within the options market saw a notable uptick. Specifically, the implied volatility for the 1-month expiry increased from 6.5 to 7.05, equating to a premium rise of over 15,000 euros on an average transaction size of 30 million euros.
Conversely, the GBP/USD risk reversals have yet to embrace a rare topside strike premium. This hesitation largely stems from ongoing fiscal uncertainties within the UK, which continue to pose challenges for GBP bulls looking to maintain momentum. Nevertheless, recent price action showed the GBP/USD pair breaking above a crucial Fibonacci level, which positions it favorably towards July's 3-year high at 1.3787. Consequently, this development has propelled the 1-month implied volatility up to 6.8, marking an increase from a low of around 6.0 just the previous week.
In the Australian dollar context, the AUD/USD pair has broken through highs not seen since 2025 and is currently eyeing the 0.6700 resistance level this week. A breakthrough beyond this level could catalyze another upward leg, further stoking volatility demand in this currency pair. Perhaps tellingly, speculative strategies betting on a topside breakout are already starting to yield positive results for traders.
Looking ahead, the upcoming U.S. policy decision scheduled for Wednesday is anticipated to inject a degree of uncertainty that could support implied volatility levels. A notably dovish outcome, such as the 50 basis points rate cut that some banks are forecasting, could serve as a significant catalyst for a broader resurgence in market activity and volatility across the board. This potential shift may lead traders to reassess their positions and hedge against increased market fluctuations resulting from the policy outcome.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
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!