FX Options Insights
Euro bulls are currently in search of a new catalyst that could propel the EUR/USD currency pair higher, but they are facing several challenges that persist in the market. Recent diplomatic engagements regarding the situation in Ukraine have provided some modest support to the euro, and peripheral European currencies have managed to hold their ground. However, a more significant, broader momentum in favor of the euro seems to be absent at this time.
The volatility surrounding the euro is notably low as bullish risk reversals have begun to ease, indicating a reduction in speculative buying interest. Additionally, gold prices have recently retreated from their peaks, which may suggest a risk-off sentiment among investors. A major factor that is creating resistance for the euro is the elevated hedging costs associated with U.S. assets. Although these costs have decreased from their highs observed in July, they still remain at a level deemed expensive.
Another psychological barrier for euro bulls is the 1.20 level, which was specifically pointed out by the European Central Bank (ECB) Vice-President Luis de Guindos in early July. This exchange rate level is acting as a significant point of resistance that traders are mindful of. Moreover, there are options expiries exceeding $9 billion positioned between the 1.17 and 1.18 levels, which are further limiting the near-term upside potential for the euro. It is anticipated that once these options roll off, the expiry calendar will open up, possibly allowing more room for euro buyers to enter the market with less resistance.
Moving forward, a dovish statement from Federal Reserve Chair Jerome Powell during upcoming discussions at the Jackson Hole Economic Symposium, weakness in U.S. equity markets, or a more favorable outlook from the ECB could serve as a catalyst for euro bulls. It's noteworthy that ECB President Christine Lagarde will be participating in discussions this Friday, and her remarks could hold significance for market sentiment. Additionally, the Citi Economic Surprise Index for the euro has been trending downwards since early August, meaning that any positive economic data releases could potentially renew interest among investors in the euro, thereby bolstering its value against other currencies.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!