EUR/USD: Investors add bearish bets despite weak US data, tighter German-US yield spreads

EUR/USD risk reversals fell to near three-month lows yesterday, signaling a rise in demand for bearish bets (put options).
Investors added bearish bets even though the US retail sales painted a dismal picture of the world's largest economy and the US-German bond yield spreads tightened.
EUR/USD, therefore, is unlikely to see significant gains. Technically speaking, the bias remains bearish while the pair is held below the 200-week moving average (MA).

Omkar Godbole FXStreet Contributor

Risk reversals on the EUR, a gauge of puts to calls, fell to their lowest level since November on Thursday, indicating investors are adding bets to position for further weakness in the common currency.

One-month 25 delta risk reversals (EUR1MRR) dropped to -0.70, a level last seen in Nov. 29, from the previous day's value of -0.675. A negative number indicates the demand (value) for put options (bearish bets) is higher than that for calls. So, the drop from -0.675 to -0.70 means the demand for put options rose yesterday despite weak US data.

The US Commerce Department reported a 1.2 percent drop in retail sales in January (the largest since Q3 2009), reinforcing dovish Fed expectations. The spread between the 2-year US and German bond yields narrowed to 305 basis points from 310 basis points in the EUR-positive manner. Meanwhile, 10-year yield spread also narrowed to 255 basis points from 258 basis points.

Even so, risk reversals dropped in favor of puts. Put simply, market sentiment is bearish on EUR/USD and hence, a bounce, if any, could be short-lived. Validating that argument is the last week's bearish close below the 200-week MA. That average is currently located at 1.1329 and the bias will remain bearish as long as the spot is held below that key level.

EUR/USD Technical Levels

1. R3 1.1381
2. R2 1.1346
3. R1 1.132
PP 1.1284
1. S1 1.1258
2. S2 1.1223
3. S3 1.1197

EUR1MRR

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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