Dec 12 (Reuters) - Euro zone interest rate futures have fully priced another 25 basis point ECB rate cut to 3.0% on Thursday, having recently scaled back bets for 50 basis points. However, FX options are pricing a significantly higher FX volatility risk premium compared to that seen before the expected October rate cut, reflecting the added uncertainty over the extent of dovish rhetoric and staff projections for the neutral rate.
Implied volatility, a proxy for actual but unknown FX market volatility, remains elevated. Overnight/next-day EUR/USD options initially factored in the ECB decision from Wednesday. Although implied volatility eased slightly following U.S. CPI data, it remains well above October ECB levels and is among the highest seen for any ECB meeting in 2024.
Overnight expiry EUR/USD implied volatility is 16.0 and has a premium/break-even for a simple vanilla straddle of 70 USD pips in either direction. That compares with 9.75 for the Oct. 16 ECB announcement, which had a premium/break-even of 44 USD pips in either direction and was one of the lowest ECB-inclusive prices in 2024.
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(Richard Pace is a Reuters market analyst. The views expressed are his own)
((Richard.Pace@thomsonreuters.com))
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