FX option implied volatility has seen a resurgence since the initial paring of the U.S. election FX volatility risk premium, with EUR/USD at the fore.

Struggling European Union growth, tariff threats and German political worries have combined with broad USD demand amid higher for longer U.S. rates to threaten a break of the 2024 low and 1.0600 EUR/USD barriers. Benchmark one-month EUR/USD implied volatility regained 7.9 on Tuesday, having dropped sharply from 9.0 to 6.25 last week.

GBP/USD one-month implied volatility regains 7.5 after falling from 9.1 to 6.6 post U.S. election, AUD/USD one-month regains 9.8 after its 12.25-8.9 drop, while one-month USD/JPY is showing less enthusiasm for now - regaining 10.25 after a post election drop from 13.0 to 9.9.

Demand for the USD underpins demand and premium for the option version of this "Trump trade" - USD calls, which give holders the right buy the USD at a pre-determined date and level for an up-front premium. However, some currency pairs such as USD/CNH have actually seen more demand and premium for USD put options to hedge the very long USD cash positions now in play.

Markets are looking ahead to Wednesday's U.S. CPI data, which is now covered by overnight expiry options. Their firmer implied volatilities are not complacent about the related realised volatility risk, but given the recent USD resurgence, there could be a bigger FX reaction to a weak USD scenario.

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(Richard Pace is a Reuters market analyst. The views expressed are his own)

((Richard.Pace@Thomsonreuters.com))