CACIB: EUR Downside Hedges Look Most Attractive in EUR/GBP - FJElite

EUR weakness has pushed implied volatility higher, particularly for downside strikes, as renewed Eurozone fiscal and political concerns widen sovereign spreads. Demand for protection has been strongest in EUR/USD and EUR/CHF, where ATM volatility and 25-delta risk reversals have already moved beyond the stress seen in comparable 2018 and 2022 episodes. EUR/JPY volatility has also risen, though the downside skew has adjusted less, while EUR/GBP has seen a more restrained move.

Relative-value measures suggest EUR/GBP volatility remains the least expensive, with longer-dated risk reversals still positive despite an increasingly negative vol/spot relationship. The 3-month EUR/GBP tenor is also seasonally cheap versus 1-month and 6-month volatility, potentially underpricing risks around France’s 2027 budget process. Against that backdrop, 3-month out-of-the-money EUR/GBP puts are seen as an attractive hedge against further euro weakness.