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Market volatility has taken a backseat after the recent U.S.-China trade tensions briefly shook things up, driving FX option premiums higher between Friday and Tuesday. Since then, implied volatility has eased, returning to multi-month lows as calmness settles over major currency pairs. Meanwhile, the U.S. dollar has softened, stepping away from its stronger stance.
This environment has brought short volatility strategies, like range binary trades, back into the spotlight. Pairs such as EUR/USD and GBP/USD are sticking to familiar ranges, and the drop in implied volatility has been a comforting signal for range-bound traders and carry traders alike.
For those concerned about potential market turbulence or breakout scenarios, long volatility positions might offer a safety net. With implied volatility already at low levels, any further decline could be limited. Additionally, these low levels mean less actual volatility would be needed to break even or generate a profit.
Looking at directional flows, there’s been steady demand for downside hedges in USD/JPY. This has pushed 1-month risk reversals to new highs for JPY calls over puts, climbing to 0.95 from being neutral just last week.
In the EUR/USD market, risk reversals are showing a slight preference for upside strikes over downside ones. However, the short-term directional outlook seems more balanced now than it has been since April’s reciprocal tariff announcements.
Meanwhile, GBP/USD has made a respectable recovery from this week’s lows. Despite this rebound, hedging activity and risk premiums suggest that the pound remains more vulnerable to losses than poised for gains.
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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!