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A slight miss in the U.S. Consumer Price Index (CPI) was enough to put some extra pressure on the U.S. dollar, but it wasn’t significant enough to spark a surge in market volatility. As a result, G10 FX option implied volatility continues to hover near historically low levels. Looking ahead, one-week expiry option implied volatility could see some support with a busy week of central bank rate decisions on the horizon. The U.S. Federal Reserve, Bank of Japan, European Central Bank, and Bank of Canada are all set to announce decisions that could impact markets. Additionally, a potentially tense meeting between U.S. President Donald Trump and Chinese President Xi Jinping looms, adding another layer of uncertainty. Despite these events, most currency pairs are still priced near long-term lows, with the notable exception of USD/JPY, which holds a higher premium compared to its peers. When it comes to actual market movement, historic (realised) volatility remains the ultimate measure. It’s even lower than implied volatility levels, underscoring how short-volatility strategies have been consistently profitable for traders in recent times.
For EUR/USD, benchmark 1-month expiry implied volatility dipped below 6.0 following the CPI release, marking a fresh 1-year low across the entire term structure. Meanwhile, risk reversals are struggling to sustain any significant premium for upside strikes. In USD/JPY, 1-month implied volatility is inching closer to its September 1-year low of 8.4. This week, 1-month risk reversals eased from 1.1 to 0.5 in favor of JPY calls over puts, signaling a lack of conviction in USD/JPY’s potential for upward momentum. GBP/USD’s 1-month implied volatility acknowledged the potential for FX turbulence and downside risks tied to the UK budget as its expiry date moves beyond November 26. However, volatility sellers were quick to capitalize on the added premium in the contract.Similarly, AUD/USD implied volatility remains near long-term lows. However, risk reversals continue to reflect a strong preference for AUD puts over calls, highlighting persistent concerns about downside risks for the Australian dollar.
All in all, while implied volatility remains subdued across most currency pairs, upcoming events could inject some life into the market—but traders remain cautious as historic volatility paints a picture of calm waters for now.
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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!