USD/JPY implied volatility is being crushed as a lack of realised volatility drives the benchmark 1-month expiry vol down to 6.9, half a vol lower than just yesterday, and without BOJ intervention it could soon be trading below the recent 4-year lows at 6.6 posted ahead of the BOJ's April 30 intervention, when USD/JPY was sold from 160.00 to the 155s. On the surface, this looks like a market that has completely given up on volatility.

But butterfly spreads tell a different story. Butterfly spreads show the implied volatility differential between at-the-money straddles (the body) versus low delta calls and puts (the wings), which in USD/JPY hold a premium for the wings. In times of low realised volatility or when there is a lack of directional risk premium, the wings typically reduce their premium over the body and favour sellers. During a bout of extreme volatility, however, low delta strikes typically post bigger implied volatility gains than those near the spot rate and can be profitable to holders.

It is therefore interesting to note an increase in the wing-to-body implied volatility premium in sub 1-month expiry low delta USD/JPY butterflies, despite the current lack of USD/JPY volatility. One-month 10-delta butterfly spreads are trading at 1.2 vols — having doubled since last week — with an even bigger differential in sub 1-month expiries. The wings are stubbornly bid even as the body collapses. This divergence is the market's canary — or rather, its butterfly — in the coal mine.

The story is asymmetric. The body is falling because USD/JPY is going nowhere and implied volatility is falling. But the 10-delta wings are a different matter, especially the JPY call wing, which is favoured to hedge against a sudden and aggressive BOJ intervention. Nobody wants to be short a JPY call when that call comes.

The result is a volatility surface that looks cheap in the main body but is quietly pricing fear in the wings. The butterfly spread is not just a volatility trade, but the market whispering that the BOJ intervention threat remains real.

Related comments -

Cheap and compelling - the case for AUD/USD options

Deutsche Bank's FX focus sidesteps US dollar for crosses
USD/JPY spot and 1-month 10 delta butterfly spread


1-week and 1-month expiry USD/JPY FXO implied volatility


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

AUD/USD has had a turbulent few months, staging a strong recovery from its late-March lows to multi-year highs before a sharp reversal over the past week as optimism around a near-term Iran deal began to fade. With markets once again building hopes for a deal that has yet to materialise, the risks to the Australian dollar remain skewed to the downside should those hopes be disappointed again. Against that backdrop, AUD/USD options continue to offer compelling value. Benchmark 1-month expiry implied volatility had compressed to levels close to realised volatility last week — a convergence that historically signals attractive entry points for both hedgers and volatility buyers. Those who took advantage were rewarded as spot sold off and implied volatility moved sharply higher. Notably however, even after that move, implied volatility remains well within the lower end of its long-term range and continues to trade close to realised levels, suggesting options are still far from expensive by any historical measure.

Risk reversals have nudged higher in favour of AUD puts over calls, reflecting a modest increase in demand for downside protection, but the premium remains well below the peaks seen in early March when market stress was at its height. For those with AUD exposure, that gap represents an opportunity — downside protection is still available at a relatively modest cost. The fundamental backdrop adds further weight to the hedging case. AUD remains acutely sensitive to China trade developments, commodity prices and RBA policy, and the ongoing Iran conflict continues to inject uncertainty into global risk appetite. While Deutsche Bank's latest FX Blueprint, published this week, flags AUD as one of its preferred currencies for the summer on the back of high commodity prices and attractive carry, that constructive view itself underscores a broader point — positioning in AUD is long and sentiment has been bullish. Crowded long positioning historically makes a currency more vulnerable to sharp unwinds in a risk-off environment, and any deterioration in the Iran situation could trigger exactly that.

Options markets are not pricing that risk aggressively. For hedgers and those looking to express a volatility view, the current environment — implied vol near realised, risk reversals well off their highs, and a binary geopolitical catalyst on the horizon — continues to make a strong case for using AUD/USD options as a risk management tool.
AUD/USD FXO implied volatility


AUD/USD 25 delta risk reversals


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

• EUR/USD FX option implied volatility is back under pressure as spot losses stall and realised volatility drops

• Benchmark 1-month expiry up from Jan low at 5.35 to 6.0 since last week a spot fell to 1.1600, but since slips to 5.7

• Risk reversals nudged higher in favour of EUR puts, recognising the spot setback — but moves remain measured

• 1-month 25-delta risk reversal peaked 0.6 EUR puts Wed, now 0.5 — well below March long-term high at 1.5

• Hedging demand was light, with the most common strikes being sought in the 1.1550-1.1500 zone

• Bottom line: price action consistent with low realised volatility and a modest downside bias — options cautious, not alarmed
EUR/USD FXO implied volatility


EUR/USD 25 delta risk reversals


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

• USD/JPY trading above the daily cloud, that currently spans the 156.38-158.98 region

• Spot has seen a 158.81-159.09 range, on Thursday, according to EBS data

• Expect bigger gains through the 159.37 Fibo, a 76.4% retrace of the 160.72 to 155.00 drop

• Market wary of MOF-ordered FX intervention but USD/JPY demand is noted on dips

• 30-day log correlation between USD/JPY and EUR/JPY is above +0.5 (pairs moving in tandem)

• BOJ Koeda reinforced hawkish expectations at June BOJ Policy Board meeting

Daily Chart


Daily Chart


(Martin Miller is a Reuters market analyst. The views expressed are his own)

• Cable has traded a 22.5 pip range thus far Thursday; 1.3420 is intra-day low

• 1.3420 is also the low water-mark since Wednesday's 1.3463 high

• UK May flash PMIs due at 0830 GMT; services PMI f/c 51.7, mfg PMI f/c 53

• UK finance minister Reeves announces measures to ease cost of living

• Streeting pledges 'wealth tax that works' in Labour leadership bid, BBC reports

• Bailey says BoE has time to gauge impact of Iran war. Fed minutes

GBPUSD


(Robert Howard is a Reuters market analyst. The views expressed are his own)

• FX options expire at 10am New York/14:00 GMT on Thursday May 21

• EUR/USD: 1.1600 (244M), 1.1725-30 (447M), 1.1750 (681M)

• USD/CHF: 0.7865-75 (1BLN)

• EUR/GBP: 0.8640-50 (920M), 0.8700 (1.2BLN)

• GBP/USD: 1.3200 (350M), 1.3250-60 (290M), 1.3435-40 (250M), 1.3455-60 (1BLN)

• AUD/USD: 0.7200 (202M). USD/CAD: 1.3625 (310M)

• USD/JPY: 158.50 (481M)

• FX options wrap - Caution creeps in (Richard Pace is a Reuters market analyst. The views expressed are his own)

• AUD/USD -0.5% Thur in wake of disappointing Apr employment update

• Markets focussed on rise in unemployment to 4.5%, up from 4.3% previously

• Data reinforces view that RBA has breathing space before next OCR move

• Rising Fed rate hike expectations will increase downside pressure on AUD/USD

• AUD targets break below 0.7093 55-DMA, door opening for move towards 0.6834

• Trump says peace negotiation in final stages, but continues to threaten Iran

• Range Asia 0.7100-555, support 0.7080 0.6834, resistance 0.7283 0.7661
AUD Daily 55-DMA

(James Connell is a Reuters market analyst. The views expressed are his own.)

• AUD/USD -0.2% Thur as employment data misses expectations

• AU Apr employment -18.6k, unemployment 4.5% (poll +15k, 4.3% respectively)

• Fed minutes reveal officials more concerned on inflation & open to FFR hikes

• Trump says peace negotiation in final stages, but continues to threaten Iran

• AUD upswing out of steam, likely to move back towards 0.7093 55-DMA

• Range Asia 0.7130-555, support 0.7080 0.6834, resistance 0.7283 0.7661
AUD Daily 55-DMA


AUD Hourly Bollinger Study

(James Connell is a Reuters market analyst. The views expressed are his own.)

• Australian gold stocks rise as much as 2.7%, their biggest intraday pct gain since May 12

• Sub-index on track to snap five sessions of losses

• Benchmark up as much as 1.3%

• Bullion gains as hopes for a resolution to the Iran conflict relieve inflation fears [GOL/]

• Gold miner Evolution Mining gains 3.8%

• YTD, AXGD down 14.7%, AXJO down 1.2%
(Reporting by Aamir Sheik Khalid in Bengaluru)

• USD/JPY remains relatively bid, Asia 158.82-94, still seen range-bound

• Off from 159.25 high Tuesday to 158.59 overnight but relatively bid still

• Back in 156.37-158.97 daily Ichimoku cloud if only barely

• Daily kijun/tenkan have converged at 158.86, 100-DMA below at 157.53

• Market wary of MOF-ordered FX intervention but demand noted on dips

• Japanese importers continue to buy for Tokyo fix, speculators on dips

• Though room for optimism on Middle East but nothing solid, crude oil off

• Fed April minutes hawkish but US yields off

• That said, little change in JGB-US Treasury rate differentials

• Some option expiries today between 158.00-05, at 158.50 below

• Related comments , , ,

• And , also , on US-Iran

• US markets , , ,

• On Fed minutes , , for more click on [FXBUZ]

USD/JPY:


US crude oil futures:

(Haruya Ida is a Reuters market analyst. The views expressed are his own)

• NZD/USD +0.9% from Wed 0.58165 low as risk appetite lifts on Iran peace hope

• NZ Apr trade balance 1.9 bln surplus (month), 2.8 bln deficit (annual)

• Trump claims Iran negotiations in final stages, but continues attack threats

• Fed minutes show policy makers becoming more open to FFR hikes

• NZD trading near upper hourly Bollinger band, uptick running out of momentum

• Range NZ 0.5867-779, support 0.5815 0.5680, resistance 0.5991 0.6012
NZD Daily 55-DMA


NZD Hourly Bollinger Study & DXY Daily 55-DMA

(James Connell is a Reuters market analyst. The views expressed are his own.)

• AUD/USD +0.9% from Wed 0.70875 low on renewed Middle East peace hopes

• Trump says Iran negotiations in 'final stages', but continues attack threats

• Brent crude -5.4%, WTI -4.9% while USD index fell 0.2% & UST yields softened

• Fed minutes confirm policy makers increasingly open to FFR hikes

• AU Apr jobs update Thur, Reuters poll consensus +15k jobs, 4.3% unemployment

• AUD rejects attempts break below 55-DMA, pair captive to broader risk moves

• Overnight range 0.7105-745, support 0.7080 0.6834, resistance 0.7283 0.7661
AUD Daily 55-DMA

(James Connell is a Reuters market analyst. The views expressed are his own.)

Nomura Research maintains a buy-ob-dips stance on JPY crosses, preferring long CHF/JPY expressions.

"The lack of sufficiently hawkish BOJ comments to out-hawk market pricing makes a bullish yen pivot difficult. Nevertheless, a fast pace move higher in USD/JPY towards 160 will further increase the risk of MOF intervention and/or a NY Fed rate check, thus increasing short JPY exposure from here does not seem to be sensible from a risk-reward perspective," Nomura notes.

"Thus, we maintain our buy-on-dips stance on JPY crosses, with with CHF/JPY standing out as an attractive long for the following reasons: 1) May seasonality is typically supportive (hit ratio of 90% since 2016); 2) EUR/CHF has not yet entered territory (below 0.91), where the SNB would likely push back against CHF strength; 3) rising equities, as markets become more “accustomed to” geopolitical headlines, providing a tailwind for JPY crosses," Nomura adds.

• NY opened near 1.1600 after EUR/USD traded downward in Asia and Europe's morning

• The pair then hit a 1-1/2-month low of 1.1583 in early NY, buyers then emerged

• USD, US yields , USD/CNH & oil moved sharply lower to help lift EUR/USD

• Hopes for a deal between the US and Iran drove investors out of safe-haven assets

• Gains in gold, silver & stocks added weight on USD and helped EUR/USD turn positive

• The pair briefly pierced the 55-DMA, traded 1.1646 then neared 1.1620 late in the day

• EUR/USD traded up +0.13% in NY's afternoon but a daily doji candle formed

• A doji indicates either the recent down trend will resume or could reverse

• Monthly RSI & inverted hammer, pair's hold below many DMAs are bear signs though
eurusd


(Christopher Romano is a Reuters market analyst. The views expressed are his own)

• GBP$ firm in NorAm afternoon, +0.36% at 1.3440; Wed range 1.3463-1.3376

• Pair slid early in session after softer than expected UK price data

• Surge in NY afternoon based on Pres Trump comment on Mideast deal progress

• Risk broadly higher, US equities rally, UST yields move lower, precious metals surge

• Despite upbeat Mideast view, UK remains mired in political, fiscal, inflation woes

• GBP$ res 1.3464 Wed high, 1.3479 /85 100-/10-DMA area, 1.3523 61.8% Fib of 1.3658-1.3304

• Supt 1.3400 psychological lvl, 1.3379/76 daily cloud base/Wed low, 1.3304 daily low May 18

GBP Chart:


(Paul.Spirgel is a Reuters market analyst. The views expressed are his own)

• NY opened near 0.7125 after 0.7088 traded overnight & AUD/USD rallied above the 55-DMA

• Pair dipped toward 0.7115 early but buyers emerged as risk-on sentiment intensified

• Hopes for a deal between the US & Iran helped to drive riskier assets upward

• USD, US yields , USD/CNH & oil all traded downward

• Gold, silver, copper and stocks rallied which helped weigh down the USD

• AUD/USD hit 0.7175 then neared 0.7155, the pair traded up +0.65% late in the day

• Techs lean bearish; daily chart shows possible head & shoulders topping pattern

• Falling monthly RSI, pair's hold below 10- & 21-DMAs add to bearish signals
audusd


(Christopher Romano is a Reuters market analyst. The views expressed are his own)

Goldman Sachs Research adopts a bearish bias on GBP in the near-term.

"UK political newsflow has picked up following local elections and, as is often the case, a rise in political uncertainty has been accompanied by FX underperformance. n this context, it is worth noting that prediction market pricing of a leadership transition by year-end has already been elevated for some time, so we attribute the recent underperformance mostly to a narrowing in the timeline, as well as the confluence of realising this political pressure with macro factors that are already challenging the UK fiscal outlook at this point," GS notes.

"Our economists note that the macro repercussions of the energy shock have already driven a further erosion of fiscal headroom, and energy futures have continued to move higher for the rest of the year. This presents a more durable risk to Sterling, and can also amplify the pass-through from political uncertainty relative to last year. It is also less clear to us that recent sources of Sterling resilience, namely a sharp rebound in global risk sentiment and larger-than-usual cross-border M&A inflows, can remain as supportive as they have been over the past few weeks," GS adds.

Sterling is likely to remain tipped to the downside, sledding around its recent 1.3304-1.3450 range in the near term, as a convergence of cooling domestic inflation, fiscal anxiety, and political instability limits upside potential.

Today's weaker-than-expected UK CPI and RPI data significantly cooled Bank of England rate expectations, driving the probability of a June hike down to near 20%.

While a lower policy path removes a key pillar for GBP bulls, the reduced rate outlook may ultimately offer a silver lining by suggesting a growth resurgence could arrive sooner — depending on the volatile war-oil-inflation function.

However, even as UK front-end rates turn less hawkish, a shifting global inflation narrative has adjusted Fed expectations, stirring UK-U.S. rate convergence, as dovish Fed expectations ebb, which will temper GBP/USD gains.

Meanwhile, the softer inflation data does little to soothe deeper structural worries. UK 10-year yields remain anchored near trend highs above 5%, heightening fiscal concerns. This is compounded by a precarious political horizon as Prime Minister Keir Starmer faces challenges to his leadership. This political instability has raised fears of higher spending, stirring memories of the gilts market meltdown under PM Liz Truss in 2022.

Technically, GBP/USD faces immediate resistance at today's high of 1.3407, followed by the bruised 200-DMA at 1.3425 and the May 18 high at 1.3450. Conversely, support rests at the daily cloud base and Wednesday low area of 1.3379/76, with more significant demand at Monday's six-week low of 1.3304.

Given the Middle East conflict overhang, severe domestic headwinds, and more hawkish Fed policy expectations GBP/USD risks remain considerably skewed to the downside.
Sterling Chart:


(Paul Spirgel is a Reuters market analyst. The views expressed are his own)

MUFG Research discusses the scope for additional round of Japan's MoF intervention to cap USD/JPY upside.

"The probable intervention in Japan that took place on 30^th April and 6^th May was always about buying time and hoping that external factors would turn in favour of a stronger yen.

In previous interventions that happened – in 2022 and July 2024 US yields fell notably in the weeks following intervention and USD/JPY fell sharply. In April/May 2024 that didn’t happen and yields remained stable at elevated levels and intervention failed. This time, the external backdrop is even more challenging – US yields are rising sharply and in these circumstances the need for additional intervention is increasing by the day," MUFG notes.

It is also likely that the US believe the real issue is the monetary stance in Japan and Scott Bessent has been vocal in the past, criticising the excessively loose monetary stance, blaming it on the weakness of the yen. Bessent met with BoJ Governor Ueda at the G7 gathering in Paris and expressed confidence that Governor Ueda would “successfully” guide monetary policy. The BoJ is likely coming under increased US pressure to hike rates, and we suspect Ueda’s tone is set to turn hawkish ahead of the next BoJ meeting on 16^th June," MUFG adds.

EUR/USD is poised for further declines as bearish momentum continues to build, with key technical studies suggesting increased selling pressure could emerge.

The pair fell to a fresh 1-1/2-month low Wednesday, even in the face of improved risk sentiment, which typically supports riskier assets. However, this environment has not translated into strength for the euro, as multiple bearish indicators remain in play.

Both daily and monthly RSI readings are declining and not yet in oversold territory, indicating that downward momentum persists. EUR/USD is trading below former support levels, which now act as resistance in the 1.1650-1.1680 range, alongside a slew of consistently declining moving averages across several time frames.

The development of a potential head-and-shoulders topping pattern on the monthly charts along with contracting 15-month Bollinger bands raises concerns about the sustainability of the current uptrend that began in early 2025.

The recent decline from the May 6 high has left the uptrend line from the March 16 low vulnerable. If this support line breaks, attention will turn to the 1.1450-1.1500 zone, where the neckline of the head and shoulders pattern resides. A breach of this neckline could unleash significant bearish pressure, potentially driving EUR/USD towards the 1.0900-1.1000 area.
eurusd


(Christopher Romano is a Reuters market analyst. The views expressed are his own)

Barclays Research flags the increasing risks of another round of Japan's MoF intervention to cap USD/JPY upside.

"Intermittent moves suggestive of intervention have continued to be observed in USDJPY even after 30 April, when the government and the BoJ are believed to have conducted JPY-buying intervention. As USDJPY has climbed towards 159. the highest level since 30 April, risks of another round of FX interventions are mounting. The MoF is scheduled to release its monthly intervention figures on 29 May, covering the period from 28 April to 27 May, but interventions since 30 April are already estimated at around JPY10tn.

Looking at the MOF's available resources for FX intervention, it held USD162bn in cash and deposits as of end-April, in addition to around USD1tn in securities. Even if it continues to intervene in FX markets, available resources remain sufficient for a while," Barclays notes.

"The summary of opinions from BoJ's April meeting struck a hawkish tone and BoJ board member Masu said in a speech on 14 May that it is desirable to raise rates "at the earliest stage possible". However, the OIS market is already pricing a c.80% probability of a 25bp hike at the BoJ's June meeting, which in turn implies that the JPY-positive impact of a rate hike itself is likely to remain limited (at least absent further communication nuance). BoJ board member Koeda is scheduled to speak on Thursday this week," Barclays adds.

Morgan Stanley Research previews today's FOMC minutes from the April 29 meeting.

"We think it is likely to see a shift toward a more neutral stance next meeting, with increasingly symmetrical guidance. The three dissents opposing the easing bias language in the statement likely understate the broader discomfort within the Committee. The minutes should provide additional color on this issue, particularly on how widespread the preference for neutral guidance is across both voters and non-voters. More clarity on the Fed's reaction function will also be a key focus. Powell suggested that further cuts require more convincing evidence from realized data, not just forecasts," MS notes.

"In light of repeated supply shocks and several years of above-target inflation, the Committee appears increasingly reluctant to rely on model-based arguments about "looking through" shocks, instead requiring clearer confirmation in the data. We interpreted these remarks as pointing toward a greater emphasis on year-on-year inflation measures, rather than extrapolations from shorter-term (e.g., three-month annualized) trends. We will look for discussion along these lines in the minutes," MS adds.

• AUD/USD fell below the 55-DMA overnight, hit 0.7088 then rallied & turned positive

• 0.7126 traded, NY opened near that overnight high, the pair was up +0.23% early NY

• Softer USD, US yields & USD/CNH drop helped underpin AUD/USD

• Rallies in gold, silver, equities & oil's drop drove risk-on sentiment, boost AUD/USD

• Daily RSI turned up, daily bull hammer formed after pair rallied back above the 55-DMA

• Monthly techs lean bearish though; RSI is falling, monthly inverted hammer in place
audusd


(Christopher Romano is a Reuters market analyst. The views expressed are his own)

• EUR/USD has been posting lower daily lows since May 11- down from 1.1794 to 1.1583 (EBS) May 20

• Wed's range is a tight 1.1583-1.1612 - helped by hedging of 1.1 billion euros of 1.1600 option expiries for 10-am New York

• 20dma has crossed below 100-dma - a bearish signal. Tech support 7 April low 1.1524, April 2, 3, 6 triple low by 1.1506

• Regaining and closing above 55-dma 1.1644 may relieve the bearish bias

• Forward-looking FX options recognise and adapt to downside EUR/USD risks, but no panic as yet
EUR=EBS


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