EUR/USD: Risk reversals and volatility gauge indicate the EUR may have bottomed out

Risk reversals have retraced put bias volatility has dropped since August 14, confirming the common currency has likely bottomed out as indicated by the technical charts.
A stronger corrective rally could be seen if the Eurozone consumer price index, due today at 09:00 GMT, beats the estimates.

Omkar Godbole FXStreet Contributor

The EUR/USD has likely found a temporary low at 1.13, the options market and technical studies indicate.

Currently, the EUR/USD one-month 25 delta risk reversals (EUR1MRR) stand at -1.1 vs -1.5 seen on August 14. The rise in the risk reversals represents a drop in the implied volatility premium (drop in demand) for the EUR put options (bearish bets).

More importantly, the one-month at the money option volatility (EUR1MO) has eased to 7.35 from the weekly high of 7.85, indicating the panic selling has run its course.

Hence, it seems safe to say the pair has bottomed out for now. Further, a similar message is being conveyed by the bullish doji reversal seen in the daily chart.

All-in-all, the stage is set for a stronger corrective rally. The common currency could pick up a strong bid if the Eurozone July CPI prints above the estimate of 0.3 percent month-on-month drop.

As of writing, the pair is trading at 1.1380.

EUR/USD Technical Levels

Resistance: 1.14 (psychological level), 1.1456 (10-day moving average). 1.1508 (June 21 low)

Support: 1.1357 (200-week MA), 1.1336 (previous day's low), 1.1301 (weekly low)

EUR1MRR and EUR1MO

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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