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EUR/USD risk reversals drop to three-year low, point to more pain

  • The options market is most bearish on EUR/USD in three years. 
  • Potential risk reset could weaken demand for the American dollar, helping EUR/USD to regain some poise.

One-month risk reversals on EUR/USD, a gauge of calls to puts, plunged to their lowest level since April 2017, indicating increased demand for put options on the common currency. 

A put option gives the holder a right but not the obligation to sell the underlying asset at an agreed price on or before a particular date. 

The slide in the risk reversals, therefore, indicates the investors are rushing to add downside bets (put options) to protect themselves from a deeper drop in EUR/USD. 

The currency pair fell to 1.0653 on Thursday, the lowest level since April 2017, as investors sold everything, even safe havens like Japan's yen and Swiss francs, to move their money into dollars over fears of a coronavirus-led recession in the global economy. 

At press time, the EUR/USD pair is trading near 1.0735, representing a 0.40% gain on the day. China surprisingly held rates steady early Friday, even so, the Asian equities managed to put in a positive performance. 

If the risk reset gathers traction in Europe, the dollar will likely come under pressure, allowing EUR/USD to extend the recovery seen in the Asian session. 

On the data front, the focus is on Germany's Producer Price Index for February and the Eurozone Current Account data for January. Across the pond, the US will release Existing Home Sales for February at 14:00 GMT. 

Risk reversals

Technical levels

EUR/USD

Overview
Today last price1.0735
Today Daily Change0.0047
Today Daily Change %0.40
Today daily open1.0692
 
Trends
Daily SMA201.1078
Daily SMA501.103
Daily SMA1001.1062
Daily SMA2001.1093
 
Levels
Previous Daily High1.0982
Previous Daily Low1.0655
Previous Weekly High1.1497
Previous Weekly Low1.1055
Previous Monthly High1.1089
Previous Monthly Low1.0778
Daily Fibonacci 38.2%1.078
Daily Fibonacci 61.8%1.0857
Daily Pivot Point S11.0571
Daily Pivot Point S21.045
Daily Pivot Point S31.0244
Daily Pivot Point R11.0897
Daily Pivot Point R21.1103
Daily Pivot Point R31.1224

Author

Omkar Godbole

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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