EUR/USD bearish bets lose value despite prospects of hung parliament in Italy

The implied volatility premium for EUR puts (bearish EUR bets) continues to drop, suggesting investors do not expect a hung parliament in Italy to have a big impact on the EUR/USD. 

The EUR/USD one-month 25 delta risk reversals are being paid at 0.10 EUR puts vs. 0.15 EUR puts on Friday and 0.775 EUR puts on Feb 21-Feb.23. Quite clearly, the risk reversals erased a major chunk of put bias (bearish bias) in the run-up to German coalition vote and Italian elections. 

As of writing, the EUR/USD is trading at 1.2327, having clocked a high and low of 1.2365 and 1.2299 earlier today. The common currency ran into offers in early Asia as reports hit the wires that Italy is heading for a hung parliament. Further, it was reported that anti-EU parties have put on a good show in the elections. However, the pair found bids around 1.23, as Merkel secured the fourth term in power after SPD backed coalition deal. 

Ahead in the day, the EUR could take cues from the Italy-German 10-year bond yield spread (higher yield spread could hurt the EUR). However, the downside could be limited as the common currency is backed by current account surplus and thus holds an edge against the USD if trade wars escalate. 

EUR/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik says the EUR's move above the 20 SMA has reinforced the bulls. Bednarik writes, "shorter term, and according to the 4 hours chart, the scale is lean toward the upside, as the pair recovered well above its 20 SMA, technical indicators maintain their bullish slopes within positive territory, while the pair ended the day near its daily high. The highs in the 1.2350 region come as the immediate resistance, with steady gains above it backing the case for an extension beyond the 1.2400 figure."

Support levels: 1.2300 1.2265 1.2220

Resistance levels: 1.2350 1.2390 1.2420