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GBP/USD clues from the FX options market

April 19, 2023By Reuters

Price action in forward looking FX options can provide clues on the outlook for a currency pair and there have been some notable changes in GBP/USD options of late.

Implied volatility is the option market gauge of actual volatility expectations when determining premium – Benchmark 1-3-month expiry is trading its lowest levels in a year by 8.0.

Risk reversals show the implied volatility premium for option strikes in one direction versus the other. They have seen their long standing GBP put/USD call (GBP/USD downside versus upside strike premium) fall to its lowest levels since September 2021.

GBP/USD option trade flows have been relatively light over recent sessions, but volatility sellers via various strikes and expiry dates are outweighing buyers.

This price action fits with a low GBP/USD volatility environment being maintained for now. It would suggest that there is less perceived risk of a substantial GBP/USD setback and there is certainly potential for more GBP/USD gains. However, the low implied volatility and lack of demand for topside strikes would suggest that any further GBP/USD gains are expected to remain a hard fought grind that lacks volatility.

Large impending 1.2450-1.2500 strike expiries can influence short term price action.

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

This article originally appeared on reuters.com

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