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Apr 10 - 06:55 AM

EUR/USD - COMMENT-ECB Poses Bigger Risk To EUR/USD Than US CPI, Options Say

By Richard Pace  —  Apr 10 - 04:45 AM

FX option pricing suggests that Thursday's European Central Bank policy announcement is deemed more likely to ignite EUR/USD volatility than Wednesday's U.S. CPI data.

The FX volatility on which options thrive is an unknown yet key parameter of the premium, so dealers use implied volatility - their best guess.
Any disparity between implied and realised volatility presents a trading opportunity.

Overnight expiry (next day at 10-am New York) options have the shortest duration, so any implied volatility gains when expiry first includes a major event can therefore offer clues about the expected FX reaction.

Overnight EUR/USD implied volatility included Wednesday's U.S. CPI data from Tuesday, but its initial gains from the prior day were tepid and short lived.
It went from 6.5 to 9.5 and settled back at 7.5 - an eventual premium for a simple vanilla straddle of 34 USD pips from 29 USD pips in either direction.

However, since also including Thursday's ECB decision on Wednesday, overnight expiry EUR/USD implied volatility has traded above 12.0 - its highest level in over a month with a premium/break-even of 53 USD pips in either direction.

There are some huge impending EUR/USD option expiries in the current vicinity and their related cash hedging flows might prevent a EUR/USD breakout after any initial data/ECB driven FX volatility.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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