As we approach this Wednesday’s FOMC meeting, the market has shown a steady appetite for USD gamma, driven by last Thursday’s OIS market repricing. The swaps market is currently pricing in a 50% chance of a 50 basis point (bp) rate cut, which has caused implied gap moves in the volatility market to adjust higher.
Here’s a deeper dive into what’s happening and why it matters:
USD Gamma and Directional Interest
The demand for USD gamma highlights a broader directional interest skewed toward a weaker USD within the G10 currencies. This outlook is primarily being expressed through EURUSD topside positions. The euro bloc offers the cheapest gamma options, making it attractive for those positioning for potential moves.
EURUSD, in particular, is at notable levels, and traders are eyeing a dovish outcome from the FOMC, which could push the spot price higher, possibly breaking above the 1.12 mark. Consequently, risk reversals have also repriced to favor the topside. For example, the 1-month 25-delta risk reversals for EURUSD last traded at 0.25 for calls during late trading in New York.
Local Gamma Longs: A Tactical Play
The desk has expressed a preference for local gamma longs, suggesting that gap moves don’t appear particularly elevated given current spot levels and recent realized volatility. This positioning takes advantage of the potential for outsized spot moves following Wednesday’s announcement without paying excessively for volatility.
GBPUSD and Euro Bloc Opportunities
While EURUSD remains a popular focus, the desk also highlights GBPUSD risk reversals as offering the best value for those looking to own USD puts in the euro bloc. Specifically, the 1-month risk reversals are currently trading at 0.1 for GBP calls, compared to 0.25 in EURUSD and 1.0 in USDCHF, indicating relative value for GBPUSD options.
Implied Gap Moves by Currency
Current implied gap moves, measured in basis points, reflect heightened volatility expectations for major currency pairs ahead of the FOMC meeting and, for some, concurrent central bank decisions. Here’s a snapshot:
- EUR: 49 bps
- GBP (BoE + Fed): 57 bps
- CHF: 53 bps
- AUD: 62 bps
- JPY: 74 bps
Chart Watch: EURUSD Spot-Risk Reversal Correlation
One interesting dynamic to watch is the correlation between EURUSD spot prices and risk reversals. Historically, this correlation has held firm for topside moves in the front, and with the FOMC meeting fast approaching, this trend could intensify, particularly if the meeting outcome leans dovish.
As the market gears up for Wednesday’s FOMC meeting, demand for USD gamma remains robust, particularly for those betting on a weaker dollar in the G10 space. EURUSD topside plays have become a key focus due to attractive pricing and interesting technical levels. For traders, GBPUSD and other pairs within the euro bloc offer compelling value in the risk reversal space.
This week could bring significant volatility, and positioning ahead of the meeting will likely be critical to navigating any potential rate surprises. Keep a close eye on implied gap moves and how spot levels react post-announcement.
IBAFIN 
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