FX options wrap - Extreme low implied volatility speaks volumes

FX option implied volatility gauges FX realised volatility risk and is a key parameter of an option premium - it's trading at long term lows.

Benchmark 1-month expiry EUR/USD implied volatility trades at its lowest levels since November 2021 at 5.0, while 1-month expiry GBP/USD implied volatility hits a 10-year low at 5.5.

Very low overnight expiry implied volatility premiums proved justified in their predictions of a limited FX reaction to U.S. PPI and retail sales data. Overnight expiry EUR/USD implied volatility was 6.0, with a premium/break-even of just 24 USD pips in either direction.

One-week expiry options include central bank policy announcements from the U.S., UK and Switzerland, but limited additions for related implied volatility suggest that they, too, aren't expected to spark a significant reaction in FX spot markets.

USD/JPY implied volatility and its premium for lower strike options notably increased last week, driven by heightened expectations of potential Bank of Japan (BoJ) policy adjustments in March or April. Nevertheless, these options have also experienced a decline in pricing, accompanied by growing scepticism regarding the magnitude of the anticipated policy measures.