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The pre-Christmas uptick in implied volatility from long-term lows faced some resistance, but the limited pullback highlights potential FX volatility ahead. Geopolitical tensions remain in the background, but all eyes are on Friday's U.S. jobs report, which could significantly shape the Federal Reserve's outlook. Adding to the uncertainty is the anticipation surrounding Trump's decision on the next Fed chair.
For GBP/USD, implied volatility has held steady at higher levels, with the 1-month expiry hovering around 6.0, up from multi-year lows of 5.0 seen in mid-December. Opportunities in USD-related gamma look appealing, especially with Jan. 23 expiries offering a chance to capitalize on upcoming UK data and any associated market moves. Interestingly, GBP/USD risk reversals have nearly wiped out their long-standing downside-over-upside strike premium in shorter tenors.
Meanwhile, AUD/USD implied volatility has found stronger support, though it remains near historical lows. On Tuesday, a notable buyer paid 8.0 for a 3-month option, while demand for topside strikes has been on the rise. Risk reversals indicate downside premiums are sitting at multi-year lows, which aligns with a bullish outlook tied to hawkish expectations from the Reserve Bank of Australia (RBA). The ongoing appetite for gold is also playing a supporting role.
As for EUR/USD, the pair continues to hover near 1.1700 amidst long gamma positioning. Hedging flows are creating a pattern of buying on dips and selling on rallies. The benchmark 1-month implied volatility saw a jump from 4.4 to 5.5 in late December and now rests at 5.25, reflecting the relatively subdued trading ranges in the market.
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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!