Sept 12 (Reuters) - Broader FX volatility risk premiums have fallen since the U.S. NFP and CPI data releases, with the exception of one-week expiries. These have surged due to the inclusion of the Sept. 18 U.S. Federal Reserve policy decision, which has the potential to trigger increased FX realised volatility.

FX volatility is an unknown, yet key parameter of an FX option premium, so implied volatility is used as a stand-in. If actual/realised volatility exceeds implied volatility, the option can profit, and vice versa. However, for the casual observer, implied volatility changes for options that include key economic events, can offer an insight as to the perceived FX reaction to that event.

Given the minimal time to expiry, overnight/next day expiry option implied volatility and its premium/break-even will always offer the most accurate expectation for the event itself, as shown by overnight EUR/USD implied volatility for Thursday's European Central Bank policy announcement. Longer maturities obviously have to factor the additional time cost/premium, which can distort the actual "event risk premium". However, the size of event driven gains in longer maturities can still warn of the impending FX volatility risks, especially if accompanied by increased demand.

One-week expiry implied volatility in the USD/Majors has increased by around 1.0 implied volatility, which is certainly not insignificant and is similar to the gains seen a week prior to the July 31 Fed. There will be a further increase for 1-week expiry JPY related implied volatility from Friday, when expiry will also include the Sept. 19 BoJ policy announcement.

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

((Richard.Pace@thomsonreuters.com))