BUZZ-COMMENT-Clues about USD and FX volatility from the options market

Feb 14 (Reuters) - FX options are inherently forward-looking and thrive on volatility and sharp directional moves, making their price action a key barometer for the FX spot market outlook.

Since volatility is an uncertain but crucial component of an FX option's premium, dealers rely on implied volatility as a proxy. Currently, implied volatility is under pressure across most currency pairs and the entire 1-12 month expiry curve, with many nearing their lowest levels of 2025.

Risk reversals, which assign an implied volatility premium to the more vulnerable directional strike, reflect shifting sentiment. Long-standing USD call premiums over put strikes in EUR/USD, GBP/USD, and AUD/USD have eroded, signalling a reduced perception of renewed USD strength and associated volatility.

Overall, FX option price action aligns with improved risk appetite and a diminishing likelihood of sustained USD gains. While dealers are hedging against further USD weakness in the coming weeks, demand for USD put strikes remains limited, suggesting that any additional declines in the dollar are likely to be measured and gradual—for now.

Less volatility means that pending expiry strikes and their related hedging flows may have a greater bearing on spot market price action nL1N3P50BL

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