Tuesday saw a broad-based FX option implied volatility sell off, many from long-term highs amid improved risk appetite and a weaker USD, but there's been a panic-driven recovery amid a resurgent USD on Wednesday.

The EUR/USD spot setback lifted 1-month and 1-year implied volatility back towards recent/2-year highs at 9.1 from 8.3 and 8.0 from 7.6, respectively, on Tuesday. Risk reversals have marginally increased EUR/USD downside over upside strike premium, too.

Big gains in GBP/USD implied volatility to new 2-year highs as spot plunged towards key support and long-term lows at 1.2299 on Wednesday. One-month expiry to 9.3 from 8.5 on Tuesday. Downside over upside strike vol premiums on risk reversals spike to new 2-year highs across the 1-12-month term structure, too.

USD/JPY 1-month implied volatility regained 10.8 Wednesday from 10.2 Tuesday, although the AUD/USD 1-month recovery was limited to 10.55 from 10.2 on Tuesday (peaked 11.2 on Jan. 1).

Market now looking ahead to Friday's jobs data, which is likely to decide whether the USD extends gains or takes a breather. Overnight expiry options will reflect the perceived realised volatility risk from Thursday.

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

((Richard.Pace@Thomsonreuters.com))