What next for EUR/USD? Clues from the FX option market
July 18 (Reuters) -FX options are forward looking and thrive on FX volatility and rapid directional moves, so their price action can offer clues about the perceived outlook for a currency pair, such as EUR/USD.
Implied volatility is the option market's gauge of actual volatility expectations, with any changes in sub 1-month expiry options typically more reactive to changes in risk sentiment and the FX outlook over a shorter term horizon.
Benchmark 1-month expiry implied volatility hit 3-year lows at 4.9 last week as a continued lack of direction and actual EUR/USD volatility took its toll and the French election risk premiums seen since mid June were completely removed. The recent EUR/USD spot up-leg through 1.0900 did help 1-month implied volatility back to 5.3, but there was no follow-through.
Benchmark 1-month expiry EUR/USD risk reversals have seen their long standing EUR put over call implied volatility premium (downside versus topside strikes) trade new long term lows at 0.1 for the downside strikes. This highlights a more neutral outlook on near term direction.
Any concerns about EUR/USD extending gains to the topside would be expected to increase demand and premiums for topside strikes, but there hasn't been much in the way of such options, certainly above the 1.1000 level. For that matter, there's been little interest to buy downside strikes, either.
To conclude, current price action in FX options is consistent with a continuation of low realised EUR/USD volatility and minimal perceived risk of a sudden move in either direction.
Thursday's ECB is not without short term FX risk, but 9 billion euros of soon-to-expire option strikes in the low 1.09's should help to limit any related volatility.
For more click on FXBUZ
1-3-month expiry EUR/USD FXO risk reversals https://tmsnrt.rs/4bOK9wj
EUR/USD FXO - 1month expiry implied volatility https://tmsnrt.rs/3W1Ew80
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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