BUZZ-FX options wrap - GBP leads scramble for volatility protection

A renewed surge in implied volatility, following a brief setback earlier this week, highlights heightened market concerns amid multiple FX risks.

Leading the concerns is the impending Trump presidency and fears over his inflation-stoking policies, which have fuelled demand for the USD and driven up option-implied volatility since the U.S. election. Meanwhile, growth worries outside the U.S. are intensifying, further undermining GBP as questions arise over the UK government's budgetary spending plans.

A GBP related implied volatility surge leads a broad based bounce from Tuesday's lows and reflect the gravity of GBP's vulnerability. Benchmark 1-month expiry GBP/USD implied volatility has jumped from 8.5 to new 2-year highs at 11.0 within 24 hours. One-month expiry 25 delta risk reversals have tripled their volatility premium for GBP puts over GBP calls, beside plenty of outright demand for strikes between 1.20-1.15 to cover the risk of deeper GBP/USD losses.

EUR/USD regains its recent and 2-year highs across its 1-12-month expiry term structure. Although a wealth of long downside strike barrier options is said to be keeping front end EUR put risk reversal premiums in check. There are billions of euros of soon-to-expire 1.0300 strikes helping to contain FX for now.

Elevated short term FX volatility risk premiums are evident for Friday's U.S. jobs data and the increased risk of related realised FX volatility, with GBP also at the fore. GBP/USD overnight expiry implied volatility has doubled through 20.0 - it also includes speech by the deputy Bank of England Governor late Thursday.

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

((Richard.Pace@Thomsonreuters.com))