Euro recovers some lost ground as market awaits ECB and Non-Farm payrolls

The EURUSD retraced to levels above 1.0600 yesterday, as the market discounts a ¼% Fed hike at the next meeting this March 14/15. Various Fed officials, including the Chair Yellen, gave speeches last week where they prepared the market for the very likely possibility of a rate hike at the next meeting.

The US has seen consistently strong economic data over the past quarter and in particular in job creation. Unemployment rate as read from the weekly Jobless Claims are at levels not seen since 1973. And Non-Farm Payrolls keep beating expectations and have been above 150k new monthly jobs over the past three months.

Inflation has also increased, helped by higher Crude Oil and commodity prices, to 1.9% which is very close to the 2% target the Fed Board has in mind. What is left to be seen is how fast the subsequent hikes will follow. Most analysts are looking for a total of three hikes for this year, with some more hawkish opinions still calling four.

This Thursday the ECB will hold a scheduled policy meeting with an interest rate announcement at 12:45pm with a subsequent press conference by the President Draghi at 01:30pm. We should hear more details about the possibility of advancing the tapering of the asset buying program, if planned at all.

On Friday at 01:30pm we will also see Non-Farm Payroll numbers from the US for February. A strong number will only increase the likelihood of an interest rate hike at the next Fed meeting. Expectations are at 180k, after last month’s 227k.

If you think that the Euro may rise against the US dollar over the next week then all you need to do is buy a Call option which gives you the right to buy EURUSD at a predetermined price (strike), for a set date (expiry) and amount of your choice.

The screenshot below shows a EURUSD Call option with a 1.05852 strike, 7 day expiry, and for €10,000 would cost €45.57, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Call option, just click on the Scenarios button.

If on the other hand, you think that the Euro will continue to fall against the US dollar then all you need to do is buy a Put option which gives you the right to sell EURUSD at a set strike, expiry and amount of your choice.

The screenshot below shows that a EURUSD Put option with a 1.05847 strike, 7 day expiry and for €10,000 would cost €43.70, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Put option.