FX traders can find clues on the EUR/USD outlook from the FX options market, given its forward-looking nature and focus on volatility and direction.
Implied volatility gauges future actual volatility and is key to option premiums - it's higher in very short-dated expiry options, highlighting the volatility risk from Federal Reserve Chairman Jerome Powell's opening speech at the Jackson Hole symposium on Thursday nL1N2FS06D.
However, one- to 12-month implied volatility is falling this week, highlighting the lack of actual volatility and inability of EUR/USD to break from recent ranges or extend recent and two-year highs.
Benchmark one-month implied volatility is 7.7 from 8.0 this week, still well above mid-August lows at 7.1.
Risk reversal contracts show implied volatility premium for EUR calls over puts (topside) has eased from multi year highs, but remains strong, especially in medium-longer term contracts, suggesting dealers still see more risk of EUR/USD gaining than falling.
Huge 1.2000 barriers are key to more potential gains, so expect fresh demand for options if the threat grows of this level breaking.
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