Given their forward-looking nature and sensitivity to volatility, price action in FX options can offer clues about market expectations — but EUR/USD traders shouldn't get too excited about a pick-up in momentum following this week's spot recovery from 1.1400 to 1.1500+. The FX volatility upon which FX options thrive is unknown, so dealers use implied volatility as a proxy. Implied volatility has been trading at long-term lows across the board - reflecting the lack of FX realised volatility in markets of late, despite the Middle East war and higher oil prices raising inflation concerns. EUR/USD has been no exception, its implied volatility trading at 2026 lows and not far from multi-year lows. USD/JPY intervention spillover lent some mild support to shorter-dated expiries, with 1-month implied volatility briefly back up at 5.2 from 4.85 on Thursday, but it's already back below 5.0 as spot is drawn to a huge 1.1500 expiry.

Risk-reversal options have been trading with a premium for EUR puts over calls since the June Fed decision (downside over upside strikes). The benchmark 1-month expiry 25 delta risk reversals reached new post-April highs at 0.8 ahead of Wednesday's U.S. Fed rate decision as traders hedged the risk of an early hike and subsequent USD gains. That premium has since fallen back to 0.3 as those downside hedges are unwound en masse after the Fed held steady. However, there hasn't been too much interest to cover the risk of an extended USD rise with outright EUR call/USD put options so far.

EUR/USD has been in a 1.1622-1.1325 range since April and the latest price action in FX options isn't giving any cause for concern about those parameters breaking as the traditional summer lull rolls on.
EUR/USD FXO implied volatility


EUR/USD 25 delta risk reversals

(Richard Pace is a Reuters market analyst. The views expressed are his own; Editing by Kevin Liffey)