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The foreign exchange (FX) markets have kicked off the year on a relatively quiet note. The ongoing U.S.-Venezuela situation has had minimal impact so far, and implied volatility continues to hover near historically low levels. Market movements reflect an absence of clear drivers for strong directional trends or heightened volatility. That said, the U.S. economy remains a potential source of volatility, as evidenced by Monday's reversal of USD gains following slightly softer-than-expected ISM data. This underscores the demand for options to hedge against potential surprises, particularly ahead of Friday's U.S. jobs report.
In the GBP space, activity has been notable, with GBP-related gamma taking centre stage. The pound has shown strength, climbing toward its September highs against the USD and nearing August peaks around 0.8600 against the EUR. This has spurred significant trading flows. Meanwhile, GBP/USD risk reversals are shedding downside strike premiums and are approaching a neutral stance on directional risk for contracts with less than one month to expiry. On the other hand, AUD/USD options are showing a preference for upside potential, with downside strikes and premiums being trimmed.
Broadly speaking, FX option implied volatility is gradually returning to pre-holiday and long-term lows. With risk appetite holding steady, FX markets are largely characterised by range-bound trading and subdued realised volatility. In such an environment, short volatility strategies remain appealing. For example, one-month EUR/USD implied volatility has rebounded to 5.5 after hitting a five-year low of 4.4 before Christmas, leaving it susceptible to reverting to its mean. A one-month 1.1600-1.1850 Double-No-Touch range binary is currently priced at around 10:1, presenting an intriguing opportunity if spot prices remain stable and implied volatility continues to ease. Overall, while the FX market remains calm for now, opportunities exist for traders who can navigate this low-volatility landscape effectively.
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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!