EUR/USD posted new lows since July 2020 at 1.1563 last week, but those looking for deeper declines will face an ongoing battle, according to FX options.
FX options pricing has been consistent in its message to EUR/USD traders over recent months - even after the September FOMC it recognised the downside risk, but warned it would lack conviction and volatility, which remains the message for now. nL1N2QP0FY
Implied volatility gauges actual volatility expectations and helps determine a premium - benchmark one-month expiry hit new pandemic-era lows at 4.5 in late September and although it's currently above 5.0, helped by Monday's inclusion of November's key Fed meeting, it's still historically low, and has met a wealth of supply.
Risk reversals show the options market increased its premium for EUR puts over calls, the right to sell EUR/USD versus buying it - from 0.15 to 0.4 last week, but benchmark 1-3-month expiries have already dropped back to 0.325.
Price action is also consistent with the presence of more barrier options, which will also help to stem deeper EUR/USD declines. nL1N2QW0IY However, those wanting to hedge the risk of more EUR/USD losses can benefit from current option pricing, by attaching knock-out triggers to vanilla EUR put/USD call options, to significantly reduce their cost nL1N2R00LB
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