A forward-looking GBP/USD derivative is worth watching for clues on the FX outlook, and there's been some changes since last week.
Risk reversals in the FX options market show how much implied volatility/option premium dealers are adding to strikes in one direction versus the other.
When GBP/USD began its fall from 1.3481 amid renewed Brexit woes and USD demand in early September, they spiked significantly higher for GBP puts over calls (downside), many to their highest since 2016, if ignoring the early March coronavirus panic nL2N2GK09E
Those premiums have eased since, which combined with some profit-taking on outright GBP put options (the right to sell GBP at lower levels), suggests investors now see a reduced threat of GBP/USD extending last week's 1.2676 low, at least in the near term.
Shorter-dated-expiry implied volatility has eased from its mid-September highs, but it's being bought on dips, consistent with a view that enough actual volatility, albeit with a range, will exist to justify these positions for now.
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