EUR/USD: Options market doesn't foresee a bearish move

EUR/USD has been largely restricted to a trading range of 1.1185 to 1.13 since last Friday. A prolonged consolidation often ends with a big move in either direction. 

One may predict a range breakdown and a big move to the downside, as the optimism stemming from Eurozone's coronavirus fund is fading. Reuters reported on Thursday that European Council's President Charles Michel is planning to propose a seven-year budget of between 1.05 trillion and 1.094 trillion euros to EU government leaders. The Commission had proposed 1.1 trillion euros.

In addition, the number of coronavirus cases is again rising in the US and other parts of the world and the International Labor Organization has warned that the second wave could result in a loss of 340 million full-time jobs across the globe. The odds, therefore, appear stacked in favor of the US dollar, a global reserve, and a safe haven currency. 

The options market, however, is suggesting otherwise. One-month risk reversals on EUR/USD shows the spread between the premium for calls (bullish bets) and puts (bearish bets) is increasing. Essentially, the options market is anticipating strength in the common currency. 

Risk reversals hit a low of -0.50 on June 12 and have been on a rising trend ever since. As of Thursday, risk reversals stood at 0.213, the highest in three weeks. 

Supporting the case for a bullish move is an uptick in market-based measures of Eurozone inflation expectations. The 5-year/5-year inflation-linked swap broke higher from its recent consolidation phase and trades at a four-month high, according to Reuters. 

It remains to be seen if EUR/USD charts a bullish breakout, as suggested by the options market and inflation expectations. At press time, the pair is trading largely unchanged on the day near 1.1235. 

Technical levels