The EURUSD currency pair has recovered almost three big figures since the last Market update. This is also reflected in the quoted implied volatilities, some of which have fallen between 1.37 (1y tenor) and 2.30 (2m tenor) percentage points. Shorter maturities have fallen even lower, but at the time these included a Powell speech and two key central bank meetings. The following Vol table shows the quotes at 06:15 NY time:
(source: cme group, own representation)
As you can see above the at-the-money (ATM) term structure between 1m and 1y is quite flat. This could indicate that the market is currently not expecting any major surprises from FED and ECB or special local events. In view of the upcoming holidays, ATM implied volatilities could perhaps fall a little further. However, I do not believe that the 8% level will be permanently undershot again. The economic environment has changed too much for that with the turnaround in inflation and interest rates. In this respect, it could be worthwhile to wait a little longer with hedging, but you do not lose much time value over the holidays for maturities over 6 months or 1 year.
In the out-of-the-money (OTM) options, however, you can see where the market sees the risk. Puts are much more expensive than corresponding calls (volatility skew). The current strength of the Euro is therefore being called into question in the options market. To put it into perspective have a look at the EURUSD Volatility Surface:
(source: data from table, own representation)
The volatility skew extremely favors low delta Puts. And this risk assessment corresponds to my opinion. From a technical point of view, the Euro could initially run to 1.1000 in the new year, but I also believe that we will see the lows of this year again in the medium to long term. Protagonists with a real need for hedging (Dollar buyers) can definitely consider hedging longer maturities at the current ATM vol levels.* On the other hand, I advise against trading activities with FX options without great conviction so close to the end of the year. Short maturities are likely to burn too much time value.
Good luck,
Sebbo
(*reminder: my content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances.)