FX option implied volatility has remained under pressure over the past week. While the USD consolidates near a two-month low in thin U.S. holiday trading, volatility remains subdued. For now, multiple factors support continued USD weakness, keeping option-implied volatility heavy.

Implied volatility across the 1-12-month expiry term structure in many of the major G10 FX pairings is trading 2025 lows. USD call over USD put premiums on risk reversals have been under pressure too.

EUR/USD option prices demonstrate the broader trend, with implied volatility at its lowest levels since November and USD call over put premium on risk reversals at their weakest since December. Trade flows suggest reduced market concern over USD strength but also limited expectations for EUR/USD to reach the mid-1.06s. Big 1.0400-1.0500 strikes expire this week and may help to contain EUR/USD.

GBP/USD implied volatility trades new 2025 lows, despite a packed UK data calendar this week, with 1-month expiry implied volatility trading at 6.8.

USD/JPY implied volatility losses have been lagging their peers and the premium for JPY calls over puts on risk reversals maintains underlying support, consistent with the lingering risk of a break below 150.00.

Meanwhile, ultra-low overnight AUD/USD implied volatility suggests the market expects little reaction to Tuesday's RBA decision. That could be complacent, given the risk that the central bank might accompany its expected 25bps cut with overtly hawkish rhetoric, or might leave rates on hold for another month.

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

((Richard.Pace@Thomsonreuters.com))