EUR/USD - Strong EUR call bias & vols pick up, eyes Catalan crisis & ECB

EUR/USD was offered at the 50-day moving average hurdle on Friday as renewed hopes of tax reform in the US put a bid under the US dollar. The currency pair fell to 1.1762 on Friday and extended losses to 1.1751 in Asia.

One-week risk reversals rise, vols pick up

• The one-week 25-delta risk reversals ticked higher to 0.40 on Friday; the highest since September 2016. It shows a strong EUR call (bullish bets) bias.
• One-week at the money (ATM) option volatility rose to 9.325; the highest level since Sep. 19

The strong call bias shows could be a sign of complacency in the market. Catalonia parliament is set to meet over the coming days to decide its response to the Spanish government’s unprecedented decision to impose direct rule. The crisis looks poised to escalate further.

Focus on ECB

Kathy Lien from BK Asset Management writes, " we believe that the central bank will opt for a dovish taper - cutting bond purchases by only 20B and extend it to September or beyond because they can always adjust it later and right now there's too much political uncertainty.  If we are right, the euro will fall and if we're wrong and the ECB marries a more aggressive reduction with hawkish comments from Draghi, EUR/USD will hit 1.20 easily."

The increase in demand for EUR calls indicates that investors believe the ECB would deliver a hawkish taper. If the ECB disappoints and/or Catalan crisis escalates, the resulting unwinding of long call positions could feed into the spot (aggravate the drop in the EUR/USD).

EUR/USD Technical Outlook

Friday's move appears to have opened doors for a sell-off to head and shoulder neckline level of 1.1660. A break below the neckline would signal the rally from the January low of 1.0341 has ended. As per the measured height method, the spot could then target 1.1228 levels.