GBP/USD realised volatility was trading close to its lowest level, ever since FOMC made some hawkish statements in previous monetary policy meeting and UK referendum month has begun, the IVs began picking up.
Just have glance on ATM IVs of 1m tenors of GBPUSD, it is spiking in a sky rocketed pace which is the highest among G20 currency segment, ATM IVs of 1w expiries are at 13.8%, likely to spike at 21.25% in 1m tenor, whereas HVs are currently flashing at tad below 8% as you can observe the vols comparison chart.
Historic volatility is probably at the floor of a persistent and stable high-volatility regime, suggesting a substantial likelihood of mean-reversion towards higher levels.
Thereby, we are seeing the steep divergence between historic and implied volatilities.
Well, bounce in realised volatility is most likely upon event risks ahead of continuous streak of data flows during mid-June.
The significant economic event such as Fed's funds rate, BoE's monetary policy decision and very importantly UK referendum on 23rd that is propping up IVs in intensified OTC FX markets.
Bounce in realised volatility is most likely upon event risks:
The 1m realised volatility is approaching 8. It now seems at a threshold between two price-action regimes. With the spot returning towards the middle of its range, it is now unlikely that volatility will experience a regime switch.
The odds favour a bounce in realised volatility, as the spot should remain turbulent. The 1m tenor includes above mentioned economic events, the 15 June Fed followed by BoE policy on very next day and the 23 June UK vote.
Hence, we believe these rising vols can play a vital role in option holders for sure especially in 2m & 3m tenors, longs in any hedging strategies are advisable, more proportions in hedging positions would fetch desired outcomes.
The material has been provided by InstaForex Company – www.instaforex.com