FX Options Insights

Risk appetite and the USD have rebounded after U.S. President Donald Trump announced he does not intend to remove Federal Reserve Chair Jerome Powell, amid optimism for a potential trade agreement with China. However, despite a decline from recent peaks, forward-looking FX options indicate that FX volatility and USD put premiums remain significantly higher than levels before the U.S. tariffs were implemented in early April. This highlights the negative impact these tariffs have on investor confidence in both the U.S. and global economies.

The U.S. administration should be motivated to prevent further economic damage; however, until there are clear signs of progress in trade negotiations, especially with China, and confidence in the Fed's independence is restored, these risk premiums are unlikely to return to their late March levels.

EUR/USD and USD/JPY have been key indicators of recent sentiment and trading behaviour changes. Traders in USD/JPY options quickly positioned themselves with new downside bets at more favourable prices when USD/JPY rebounded from below 140.00 to above 143.00. Setbacks in EUR/USD implied volatility have been minimal, and there remains a strong premium for calls over puts.