EURUSD Rallies on Weak US PMI Data Running Up To Tomorrow’s ECB Meeting

The Euro experienced a strong rally against the US dollar yesterday when data for Manufacturing PMI and Economic Optimism were released much lower than expected. The Manufacturing PMI had been expected in line with the previous number at 55, and was released at 51.4.

The market perceived a lower chance of an imminent interest rate hike in the US, due to a poorer economic outlook, and price jumped from 1.11637 pre data to a session high of 1.12595. Economic Optimism data had been expected slightly higher than the previous data at 48.6 but was released at 46.7. Although not as important as the PMI number it helped fuel pessimism for the US dollar.

Tomorrow we have a scheduled monetary policy meeting by the European Central Bank (ECB), an interest rate decision will be announced at 12:45pm. The market consensus is for the main lending rate to remain at 0% and the main deposit rate at negative 0.40%

More importantly at 1:30pm there will be the usual post meeting press conference by the ECB President Draghi. A lot of attention will be paid as to whether there will be any hints to the possible extension of the quantitative easing programme. The market is not expecting increases in the amount of bond buying or extensions to the length of the programme.

If you feel that volatility for this pair will increase over the next week then all you need to do is Buy a Straddle strategy, which consists of simultaneously buying a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a EUR/USD Buy Straddle with a 1.12587 strike, 7 day expiry, and for $10,000 would cost $101.26, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Buy Straddle, just click the Scenarios button.

If on the other hand you feel that volatility will decline or remain the same over the next week then all you need to do is Sell a Straddle strategy, which consists of simultaneously selling a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a EURUSD Sell Straddle with a 1.12598 strike, 7 day expiry and for $10,000 would generate $80.57 in revenue, with a maximum risk of $305.77.

This screenshot shows the profit and loss profile of the above Sell Straddle.