EUR/USD: Put demand eases ahead of the ECB
|- EUR/USD weekly risk reversals, which cover Thursday’s ECB, indicate falling demand for the cheap out of the money EUR put options (bearish bets).
- EUR/USD closed above 55-day MA, signaling a bottom is in place at 1.1508.
The demand for the EUR puts has dropped sharply in the run up to this Thursday’s European Central bank (ECB) rate decision and Draghi presser.
The one-week 25 dealt risk reversals are being paid at 0.475 EUR puts–the highest level since early June. More importantly, the risk reversals were paid at 1.00 EUR puts on July 19.
The decline from 1.00 to 0.475 indicates a falling implied volatility premium or falling demand for the cheap out of the money EUR put options and could be an indication the investors are expecting Draghi to shrug off trade war fears and reiterate commitment to end QE program in December.
Further, the bullish risk reversals gel well with the upbeat technical picture. The spot closed above the 55-day MA on Friday for the first time since April 20, confirming a short-term bottom has been made at 1.1508 (June 21 low).
That said, the record US-DE (German) yield differential could limit the upside in the common currency. As of writing, the 2-year yield spread is hovering at 322 basis points - the highest since 1990.
Resistance: 1.1791 (July 9 high), 1.1852 (June 14 high), 1.1959 (100-day MA).
Support: 1.1708 (55-day MA), 1.1575 (July 19 low), 1.1508 (June 21 low).
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