Implied volatility is how the FX options market gauges expected volatility over a given time.
Owners want actual volatility to outperform it, and overnight- expiry (next day at 10 a.m.
New York) implied volatility has increased since capturing the European Central Bank policy announcement.
Overnight expiry first captured the ECB on Wednesday, with marginal gains to 12.5 from 11.0, but it's edged up to 13.0 since - so there are some nerves about increased EUR/USD volatility, but not excessive.
The premium/break-even for a simple vanilla straddle at 13.0 implied volatility is $65 pips in either direction, compared with $55 pips at 11.0 before expiry captured the ECB.
For context, overnight expiry EUR/USD implied volatility added 4.5 to 14.5 when it captured the Sept.
10 ECB, a break-even of 73 pips, which proved justified by the related EUR/USD spike from 1.1850-1.1917 and drop back toward 1.1800 after the announcement.
However, the market expects a dovish lean today, so the overall reaction should be relatively tame, although any mention of displeasure with EUR/USD strength could increase actual volatility.
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Overnight expiry EUR/USD implied volatility Click here