Thursday's ECB is not without FX risk - options show
July 17 (Reuters) -The European Central Bank (ECB) is not expected to adjust policy before September, so Thursday's announcement shouldn't have any real effect on FX, but option markets aren't ruling out some related FX volatility.
Implied volatility substitutes actual volatility, which is a key, yet unknown parameter of an FX option premium, so any changes are indicative of a shift in actual volatility, or expectations of a shift.
Overnight options expire the next working day at 10 a.m. ET (1400 GMT), so are the go-to bellwether for perceived short term FX volatility potential when that expiry includes a potentially market moving event, like a central bank policy announcement.
Overnight expiry EUR/USD implied volatility opens 2.0 higher at 8.0 since including Thursday's ECB announcement. For a simple vanilla straddle that's a premium/break-even of 36 USD pips from 28 USD pips in either direction.
However, that's still a relatively small increase compared to past ECB meetings and other volatility generating events. For context, the June 6 ECB meeting saw overnight expiry EUR/USD implied volatility reach 12.5 prior - a premium/break-even of around 60 USD pips, with similar levels before the 11 April meeting.
EUR/USD has been contained by the hedging of billions of euros of 1.0900 strike expiries over recent sessions and there are billions more due to expire on Wednesday and post ECB Thursday.
For more click on FXBUZ
Overnight expiry EUR/USD FXO implied volatility https://tmsnrt.rs/3WayJNk
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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