FX options signal surging volatility under Trump
Nov 22 (Reuters) -FX options markets are signalling that traders initially underestimated the impact of a Donald Trump presidency on currency markets and are now scrambling to cover the risk of increased FX volatility before and after he takes office.
EUR/USD, the most liquid and widely traded currency pair, has long been a barometer for broader FX market trends. After two years of range-bound trading, implied volatility in the pair had dropped to long-term lows, reflecting subdued market conditions. FX options are inherently forward-looking and thrive on volatility, which is measured by implied volatility.
Before the U.S. election, implied volatility surged to reflect uncertainty and the perceived binary nature of the outcome. However, once Trump’s victory was confirmed and a brief post-election surge in U.S. dollar strength soon faded, markets quickly recalibrated, assuming limited immediate risk given the transition period before January.
But as Trump's policies began to sink in - particularly on trade, inflation, central bank expectations and geopolitical tensions surrounding Ukraine and Israel - the market's outlook shifted. The U.S. dollar continued to rally, particularly against the euro, where the impact of U.S. tariffs could exacerbate already fragile growth. As a result, EUR/USD broke through long-term lows, triggering a resurgence in FX option demand and driving implied volatility premiums to new highs.
Similar trends are emerging in other currency pairs. While not yet as pronounced as in EUR/USD, rising demand for options and implied volatility, particularly for expiries extending through 2025, signals that FX volatility could intensify in the months ahead.
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1-month expiry FXO implied volatility https://tmsnrt.rs/3Z05D4S
3-month expiry FXO implied volatility https://tmsnrt.rs/3ATZ0ZK
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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