EUR/USD retraces 50% of the recent sell-off, IVs pick up, what's next?

The EUR/USD pair rose for fourth straight day on Wednesday and almost touched 1.1881 (50% Fib R of 1.2092-1.1669).

The uptick in the EUR gathered pace as Catalan fears eased. The broad based USD weakness following the less hawkish Fed minutes only added to the positive tone around the EUR/USD pair.

Highest EUR call bias across the curve since 2009

  • As per Reuters report, risk reversals reflect their highest EUR call bias across the curve since 2009. Three-month and 1-year risk reversals show highest EUR call bias since 2009 at 0.5 and 0.15. The one-month 25-delta risk reversals jumped to 0.5 on Wednesday.

  • Meanwhile, the one-month ATM option volatility jumped to 7.375 from the recent low of 6.9.

Reuters report also says the options market is short of strikes above 1.2000. Thus, a break above the psychological level could accelerate gains as sellers would be forced to unwind their shorts.

Focus on yield spread

The US-German 10-year yield spread narrowed to 188 basis points yesterday from 190 basis points, which validates the EUR rally.

The spread may narrow further if the US PPI (due at 12:30 GMT) disappoints expectations. The yield spread may also move following the speeches from Fed's Brainard and Powell and ECB's Draghi and Praet.

Widening of the yield spread would lift the US dollar and vice versa.

EUR/USD Technical Outlook

FXStreet Chief Analyst Valeria Bednarik writes, "from a technical point of view, the pair presents a positive tone ahead of the Asian opening, as in the 4 hours chart, the price has managed to advance further above its 20 and 100 SMAs, with the shortest gaining upward strength below the largest, which anyway maintains a bearish slope. Technical indicators in the mentioned chart had lost upward strength, but hold near overbought readings, in line with further gains ahead, as long as pullbacks are contained around 1.1820/30, a major static support now after the pair recovered the level earlier this Wednesday. To the upside, sellers have surged on approaches to the 1.1900 figure, which means that an advance beyond the level should lead to a continued advance, up to 1.1965.

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