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EUR/USD risk reversals show options traders still aren't paying a premium for topside strikes over downside, even as the premium for downside protection shrinks. G10 FX implied volatility is falling and the EUR/USD curve is edging towards a return to long-term lows. The ongoing lack of realised volatility and diminished event risk are weighing on premiums.

Risk reversals show a smaller premium for EUR puts over calls across all maturities. That is a clear shift, but there's no rush to flip this directional risk premium to topside strikes. The benchmark 1-month risk reversal has settled at 0.2 in favour of EUR puts, down from 0.6 in mid-October and 1.6 in early October. The contract hasn't traded with a topside strike premium since a brief foray in late August. Options buyers have cut what they pay for downside protection, but they haven't yet started paying a premium for upside over downside protection.

Further out, the picture is more cautious. Longer-dated risk reversals hold a higher premium for EUR puts over calls, which shows a greater perceived risk of EUR losses than gains. The April-May 2027 French elections are seen as a risk to the EUR, and they are keeping a bid under downside strikes from the 6-month expiry.

For now, that leaves the short end closer to neutral and the longer end still leaning towards downside protection. A topside premium at the 1-month point would be the first sign that sentiment is turning.

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(Richard Pace is a Reuters market analyst. The views expressed are his own)