EUR/USD risk reversals are FX option structures that benefit from volatility in one direction over the other, and shifts in their pricing offer valuable clues about directional risk sentiment in the broader FX market. Implied volatility itself is the market's primary sentiment gauge. Because actual, or realised, volatility is unknown in advance — yet central to how an option is priced — dealers use implied volatility as a forward-looking proxy for expected price risk. Right now, that gauge is unusually subdued: EUR/USD implied volatility remains low, a function of muted realised volatility in spot despite ongoing Middle East tensions that might otherwise be expected to inject more risk premium into the pair. But averaged implied volatility only tells half the story. Risk reversals — which combine a long position in one strike with a short position in the opposite strike — reveal the directional skew within that volatility, showing whether dealers expect upside or downside moves to be more likely to lift implied volatility. A rising premium on one side signals that the options market is positioning for, and pricing greater risk of, a move in that direction.

This is where the signal becomes actionable: when spot moves in the same direction as the risk-reversal skew, it tends to validate and reinforce that pricing, often coinciding with a fresh leg higher in implied volatility as realised volatility catches up with what options markets had already flagged.

The current setup fits this pattern. The benchmark 1-month expiry 25 delta EUR/USD risk reversal is holding near recent highs, with the EUR put over call premium (downside over upside) around 0.55. That's a firm skew, and it suggests the options market remains alert to renewed EUR/USD weakness even as spot volatility itself stays contained for now.

The persistence of that downside premium — rather than a fade back toward flat — is the key tell. It implies dealers aren't treating recent EUR/USD resilience as a reason to unwind downside hedges. Should spot begin to slip in a way that aligns with that skew, it would likely coincide with implied volatility waking up from its current lull, turning today's quiet vol backdrop into tomorrow's catch-up trade.

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EUR/USD 25 delta risk reversals


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