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Dec 07 - 06:55 AM

GBP/USD - COMMENT-FX Options Warn Of Deeper GBP/USD Declines

By Richard Pace  —  Dec 07 - 05:13 AM

Price action in forward-looking foreign exchange options has proved indicative of the GBP/USD outlook over recent months and remains consistent with the risk of higher volatility and potentially deeper GBP/USD declines.

Implied volatility is the FX option market's gauge of actual volatility expectations and is a key determinant of premium.
It rallied from pandemic-era lows in late September as GBP/USD fell from near 1.4000 to 1.3400, and has remained elevated since.

Benchmark 1-month implied volatility reached 8.1 from 5.8, and subsequent setbacks have been meeting good demand in the low/mid-7s over recent weeks.
1-year implied volatility reached 8.6 from 7.0, with setbacks stalling in the lower 8s.

Risk reversals show implied volatility premium for GBP puts is much greater than calls - the right to sell, versus buy GBP/USD.
That premium extended to new highs since the December 2020 Brexit agreement and setbacks have also proved minimal.

DTCC data shows the traded volumes of GBP puts versus calls since early October are the highest all year, and apart from a brief spike before the end-2020 Brexit agreement, the highest since the COVID-19 pandemic began.

For more click on FXBUZ

1-month and 1-year GBP/USD FX option implied volatility Click here

GBP/USD 1-3-month expiry FX option risk reversals Click here

GBP puts vs call volumes Click here

Refinitiv IFR Research/Market Commentary


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