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Overnight, G10 FX option implied volatility has surged by 20%–30% since Wednesday, as traders factor in the potential for heightened market swings ahead of the U.S. jobs data release on Friday. This uptick reflects a sense of caution rather than outright panic, signalling that the market is prepared for risk but maintaining a measured approach. This composed sentiment is mirrored in broader FX option implied volatility, which remains near historically low levels.
The EUR/USD pair, for instance, has been trading within a narrow range since June, pushing its implied volatility to its lowest point in five years. In this low-volatility environment, short volatility strategies have continued to yield positive results. The market is currently positioned long gamma, and associated hedging flows are reinforcing the tight trading ranges and subdued volatility. Additionally, January typically sees a seasonal drop in FX volatility, with EUR/USD implied volatility declining about 80% of the time during this month over the past two decades. However, SocGen has suggested this pattern could face challenges in 2026 and has proposed some hedging strategies to consider.
USD/JPY remains steady but confined within a range, supported by technical factors and constrained by the potential for Bank of Japan intervention. There’s little indication of an imminent breakout, and its implied volatility is hovering at long-term lows. Similarly, the familiar premium for JPY calls over puts via risk reversal contracts remains subdued.
Meanwhile, AUD/USD has experienced a notable reduction in downside bets and corresponding volatility risk premiums. There’s also renewed interest in topside options targeting levels around 0.6900. Although recent price gains have slowed, there’s little indication of mounting concern over a deeper decline.
As for GBP/USD, the pair continues to exhibit enough intraday movement to justify its current implied volatility levels. The benchmark one-month expiry has remained anchored near 6.0% this week, recovering from a multi-year low of 5.0% seen in mid-December. This suggests a stable yet dynamic trading environment for the pound-dollar pair.
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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!