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Friday's weaker-than-expected jobs data from the United States has resulted in sustained pressure on the USD, leading to a premium being maintained for USD puts when compared to the EUR. EUR/USD remains a favored option for traders looking to short the USD. This indicates a market sentiment that remains cautious regarding the strength of the USD in light of the recent employment figures.
Despite this bearish outlook for the USD, the implied volatility of EUR/USD, as well as that of many other currency pairs, is currently below the peaks observed prior to last week's Non-Farm Payroll (NFP) report. This decrease in implied volatility reflects a recovery in the USD from its recent lows, as well as a reduction in the risk premium associated with the heightened volatility seen on Friday.
Interestingly, the implied volatility for EUR/USD does not seem to account for any potential foreign exchange impact from the French parliament's confidence vote scheduled for Monday. However, the overall weak outlook for the USD is keeping a premium on options that favor upside movements over downside movements, particularly for those with longer durations. This suggests that traders are still positioning for potential upward swings in the EUR/USD pair, despite the current market conditions.
On the GBP/USD front, there has been a reversal in the implied volatility and the risk premiums associated with downside versus upside strikes, countering the gains observed in the previous week. Although there seems to be less immediate pressure on the GBP ahead of the upcoming November budget, there remains uncertainty regarding how the budget will affect UK investments and the GBP's performance in the longer run.
Monday's trading activities appear to be heavily influenced by JPY-related currency pairs following the resignation of Japanese Prime Minister Shigeru Ishiba on Sunday. Traders are particularly focusing on options that expire in early October, speculating on a potential weakening of the JPY. Notably, a substantial transaction involving a six-week expiry 10 delta JPY put against a USD call was executed, reflecting an implied volatility of 9.95 on a massive $1 billion deal. Additionally, the benchmark 1-month USD/JPY expiry is set to occur shortly after the anticipated election date of October 4, marking a substantial high of 10.1 as seen in the previous week.
Looking ahead, the near-term risk that is currently bolstering support for shorter-dated expiry option implied volatility hinges on the U.S. Consumer Price Index (CPI) data set to be released on September 11. A figure that falls short of expectations could increase the likelihood of the Federal Reserve opting for a 50 basis point rate cut the subsequent week. This scenario introduces an additional layer of uncertainty into the market as traders brace for the potential impact of this economic data on future monetary policy decisions.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!