BUZZ-FX options wrap-Powell and CPI risk and other FX signals

Overnight FX option implied volatility was barely changed when its expiry included Tuesday's Federal Reserve Chair Jerome Powell's semi annual testimony to the senate banking committee and Wednesday's U.S. CPI data. There's typically a significant increase before U.S. CPI data, which would suggest the market isn't expecting much in the way of subsequent FX realised volatility this time.

Broader implied volatility has softened of late, along with its premium for USD call over puts in many currency pairs. This reflects a current lack of actual/realised FX volatility and less perceived risk of a sudden resurgence.

One-week expiry implied volatilities have fallen sharply in February and are now threatening post-inauguration day lows, despite the impending U.S. data and simmering threat of more tariff related headlines. Benchmark 1-month expiry implied volatilities are also trending lower, but currently at a more gradual pace.

USD/CNH implied volatility is probing its lowest levels since August 2024 and risk reversals have reduced their USD call over put premiums. Price action here is consistent with less perceived risk of further sharp yuan losses.

If Powell and the U.S. data can leave FX trading quietly within ranges, implied volatility should remain heavy and some large G10 FX option strikes and related hedging flows can have a greater influence on FX spot for the remainder of the week.

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