Watch these fear gauges for further EUR/USD clues
Nov 25 (Reuters) -FX options are forward-looking instruments which thrive on volatility and sharp directional moves in currency markets. The associated premiums and price movements often serve as reliable indicators of market sentiment, acting as "fear gauges", and they have recently provided significant insights into the EUR/USD pair.
Implied volatility gauges realised volatility expectations, a key part of the option premium, and it was edging higher throughout last week.
Risk reversals show any implied volatility premium for option strikes in what is perceived to be the most vulnerable direction and that which would further increase volatility. They were increasing their downside over topside strike premiums to ever new longer-term highs last week.
This price action proved founded when EUR/USD took a hit after Friday's weaker than expected Euro zone PMI data. Long-term lows and big option barriers at 1.0450 were erased, which initiated a short gamma-led acceleration to 1.0340 and gave implied volatility and risk reversals another leg higher.
There has been retracement in these option prices since, however, which could suggest that FX consolidation is now expected and that another rapid descent that exceeds last week's EUR/USD low is deemed unlikely for now.
Benchmark 1-month expiry implied volatility peaked at 8.8 on Friday after having fallen from 9.0 to 6.25 immediately after the U.S. election. It is now 8.4. Implied volatility through to the 1-year expiry reached new long-term highs on Friday, but is marginally softer on Monday.
Risk reversals have seen a bigger retracement from Friday's long-term highs, especially the 1-month 25 delta contract. It reached 1.1 on Friday but has since reverted to 0.75.
There are big nearby FX option strike expiries through this week's U.S. Thanksgiving holiday which could help to limit and contain EUR/USD.
For more click on FXBUZ
1-3-12-month expiry EUR/USD option implied volatility https://tmsnrt.rs/4fFwqdH
EUR/USD FX options - 1-3-12-month expiry 25 delta risk reversals https://tmsnrt.rs/4fJNIqc
Richard Pace is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond
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