FX options wrap - CPI and Inauguration priced for FX volatility

Speculation surrounding Donald Trump's trade policies and their potential implications has been a key driver of USD strength and FX volatility since the U.S. election. With his inauguration approaching on Monday, option traders are hedging against the risk of swift policy implementation.

One-week FX option implied volatility has risen further as it now includes this risk. It was already elevated due to this week's extensive U.S. data releases, the most significant of which — the Consumer Price Index — is now covered by overnight expiries.

Among major pairs, overnight GBP/USD implied volatility stands out as the highest, reflecting the inclusion of key UK inflation data in its expiry.

Broader implied volatility saw a slight reprieve on Tuesday amid speculation about the potential for a more gradual rollout of trade tariffs, however, moves were limited, as the market continues to brace for major event risks ahead.

GBP/USD has led the broader implied volatility surge, reaching new two-year highs alongside EUR/USD on Monday. Yet, realised volatility metrics lag far behind and might actually favour a short volatility strategy.

There are many more EUR/USD downside exotic option barriers from 1.0175, which might serve to slow any deeper near term FX declines.