EUR/USD: Low volatility environment has ended, put demand weakens

  • EUR/USD's volatility gauge hits the highest level since October. 
  • Demand for put options or bearish bets has weakened sharply in the last seven days.
  • Focus today is on the action in the US treasury yields.

Options market data shows the low volatility environment in EUR/USD has ended and the demand for put options (bearish bets) has weakened sharply in the last five days. 

One-month ATM volatility, which measures the calculated or implied mid-rate volatility for an at-the-money (ATM) option, has jumped to 5.625, the highest level since Oct. 3. The volatility gauge has surged in a v-shaped manner from lows near 3.60 seen at the end of January. 

Volatility rose as the EUR/USD fell sharply from the high of 1.1096 seen at the end of January to the low of 1.0778 on Feb. 20. The single currency has regained some poise in the last three trading days. At press time, the pair is trading at 1.0866, having clocked a high of 1.0890 on Tuesday. 

ATM volatility

Put demand weakens

The recovery in EUR/USD is accompanied by a weakening of demand for put options, according to risk reversals, a gauge of calls to puts on the common currency. 

One-month risk reversals rose to -0.125 on Tuesday, having bottomed out at -0.55 on Feb. 18. The rise represents a fall in demand or implied volatility premium for the put options. 

A bullish shift in the sentiment would be confirmed if and when the metric crosses above zero. 

As for today, the pair may challenge and possibly break above Tuesday's high of 1.0890 if the US yields continue to lose altitude on coronavirus scare. Currently, the 10-year Treasury note is trading at 1.37%, representing a five basis point gain on the record low of 1.32%. 

Risk reversals

Technical levels

    1. R3 1.0965
    2. R2 1.0928
    3. R1 1.0905
  1. PP 1.0868
    1. S1 1.0845
    2. S2 1.0807
    3. S3 1.0784


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