Is the sharp increase in put prices a sign of EUR/USD correction?
|EUR/USD has been trading within a wide range since mid-January, as investors remain sceptical about further gains. After hitting 1.2537 on January 25th, the single currency has been grinding lower and moved as low as 1.2206 before stabilising at around 1.2320.
Looking at the option market, one can notice that the price of put options have increase steadily since January 2nd, especially for shortest term maturities, which tends to suggest that market participants are bracing for a correction in EUR/USD. The 1-week 25-delta risk-reversal measure hit -0.6375% yesterday, while the 1-month one stood at -0.7725%, compared to 0.22% and 0.2625% on February 2nd, respectively. For now, the sharp increase of put prices has not affected the spot market. However, this price divergence tends to suggest that investors are positioning themselves for a stronger US dollar. Indeed, the next couple of months will be key as the Fed, which has a new boss, Jerome Powell, is expected to lift interest rate in March. In addition. Rising inflation pressure in the US has forced investors to revise their rate hike expectations to the upside.
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