BUZZ-COMMENT-The EUR/USD outlook according to FX options

Feb 17 (Reuters) - Given their forward-looking nature and reliance on FX volatility and directional moves, FX options can offer clues on the outlook for a currency pair, with recent price action indicative of the EUR/USD outlook.

First and foremost is implied volatility, which substitutes actual/realised volatility and is a key part of an FX option premium. EUR/USD implied volatility has been under pressure since early last week to the point where the 1-12-month expiry term structure is trading its lowest levels since November.

Risk reversals charge an implied volatility premium for the direction in which a currency pair is perceived to pose a greater risk of increasing volatility - its most vulnerable direction. One-twelve month expiry EUR/USD risk reversals have seen their downside vs upside strike volatility risk premium fall to new 2025 lows over recent sessions, although it's still intact, especially longer-dated expiries.

Trade flow offers clues too, as hedgers and liquidity providers establish and adjust positions. Short-term expiry protection against moves through 1.0000 have been pared, while demand for topside protection has increased, although most of the strikes were between 1.0450-1.0650.

The overall price action in FX options suggests a lower perceived risk of EUR/USD retesting or extending its recent and two-year lows at 1.0125 in the near future. However, any further recovery is expected to remain limited to 1.0650, with the pair likely to be subjected to less volatility within a lower range.

For more click on FXBUZ