BUZZ-FX options wrap - FX volatility fear gauges reverse course

Implied volatility gauges realised volatility risk and is a key parameter of FX option premiums. Its under broad based pressure and extending setbacks from recent and 2025 highs.

The U.S. CPI data came in slightly softer than expected, easing concerns that new tariffs could trigger stagflation. This helped stabilise the recent stock market decline and sparked a modest recovery in broader risk appetite—key factors contributing to lower option premiums.

USD/JPY options have seen the sharpest reversal, driven by the GPIF news on Tuesday and spot since regaining 149.20 from 146.55. Benchmark 1-month expiry implied volatility reverts to 11.0 from a 12.4 peak and 1-month risk reversals from 1.85 to 1.3 JPY calls over puts. Barriers at 145.00 remain intact to reward those long JPY calls with RKO triggers.

EUR/USD 1-month expiry implied volatility reverts to 8.3 from 9.0 on Tuesday, while sub 3-month expiry risk reversals had already unwound the bulk of last week's gains to new multi year highs for topside strikes. Those setbacks were aided by a supply of newly acquired EUR calls with RKO triggers - many at 1.1500.

GBP/USD 1-month implied volatility falls back to 7.7 from last weeks 8.6 peak and 1-month AUD/USD to 9.7 from 10.5.

There is potential for deeper declines in implied volatility, particularly in shorter-dated expiries, if risk appetite remains stable and FX markets continue consolidating recent moves.

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

((Richard.Pace@Thomsonreuters.com))