Euro: Options signal downside risk against US Dollar – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret note that EUR/USD is consolidating within a very tight range in the mid-to-upper 1.13s. Stable European Central Bank (ECB) rate expectations and supportive yield spreads are helping limit downside pressure, while increasingly negative risk reversals point to stronger demand for protection against Euro (EUR) weakness. Technically, the pair remains bounded by support in the low 1.13s and resistance near 1.1480, with a clear break needed to establish the next directional move.

Options market prices Euro downside risk

"Fundamental releases have been limited to third-tier German import price data, showing signs of a potential peak following a energy-driven surge that lifted the y/y pace above 6%. ECB rate expectations are steady following their recent fade, delivering fundamental support via yield spreads – with near-term risk centered on US developments as we look to the 2pm ET FOMC rate decision."

"The options market is signaling a somewhat worrisome development however, and follows the deterioration in speculative positioning revealed by the latest CFTC data."

"Risk reversals are pushing deeper into negative territory, closing in on their late June lows, indicating a growing premium for protection against EUR weakness."

"Bearish/neutral—the RSI is showing signs of a tentative recovery, remaining bearish below 50 but off its earlier lows in the high-30s. The local range from June is bound by support in the low-1.13s and resistance closer to 1.1480. We await a break"