#FX option price jump warns of impending #US #CPI risk (10 Jan 2024)

Overnight FX options now expire after Thursday's eagerly awaited U.S. CPI data, and an increase in related implied volatility shows a greater perceived risk of the data boosting realised FX volatility.

Markets are pricing more 2024 U.S. rate cuts than the U.S. Federal Reserve is predicting, so incoming U.S. data is key to determining the correct path.

If Thursday's U.S. CPI doesn't drop to its lowest since mid 2021 at 3.8% as expected, the USD could benefit and realised FX volatility increase.

Overnight expiry EUR/USD implied volatility has jumped to 12.5 from 9.5 since including the data - a premium/break-even of 57 USD pips from 41 USD pips in either direction.

This shows the additional realised FX volatility that is now required to cover the premium.

Overnight expiry USD/JPY implied volatility has increased to 17.5 from 14.5 since including the CPI data - a new premium/break-even of 106 JPY pips from 87 JPY pips in either direction.

Overnight AUD/USD implied volatility reached 17.0 from 14.0 after including the U.S. CPI data - a jump in premium/break-even from 39 USD pips to 48 USD pips in either direction.

If the data fails to excite markets with an in-line reading, the USD is more likely to maintain recent ranges and keep pressure on broader implied volatility in the process.

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