Holiday almost everywhere in EU markets today. Here’s the monthly outlook from Alpha Picks for EUR/USD. Apologies if taking up too much space…
The ECB will be meeting on April 11th, and this should play out interestingly. Looking at the EURO on the 1 month time frame is where we will begin. We have observed massive demand for put buying relative to calls, and I do believe that this will continue to be the case into the ECB meeting as the market starts to anticipate a much more dovish ECB relative to the FED. This should start to put some downside on the EUR/USD. Hence, there is anticipation for this sideways chop in EUR/USD spot to start to fade, and for the EUR to move lower relative to USD. Implied vol on the one month has started to rise with a 40bps rise in implied vol now sitting at 5.40 vols.
Looking at the EUR/USD 1m Risk Reversal 25 delta, we are now witnessing rollover. Currently, we are seeing more buying of puts than calls. However, since COVID the overall level is relatively in line with where the options activity has been. Looking at the implied vol. this is also relatively low, and it does not appear that anything interesting is happening on the vol front with vol continuing to remain relatively suppressed.
Regarding the meeting for the ECB. I would expect the potential of witnessing the demand for puts to outstrip the demand for call buying, and potentially adding to some downside in the EUR/USD which over the last 3 months has been stuck in a range between 1.07-1.10.
Now observing the EURO, we witness something rather interesting happening with the term structure. We are only just starting to see widening until further out the maturity of the term structure. This implies that there is a macro risk that is being priced into the EURO, and thus traders are cautious about the outlook. This is driven by low expectations for growth, low productivity, and geopolitical issues within the Red Sea that seem more likely to hurt the EU compared to the US. Once again supporting the thesis that we should observe weakness in the EURO overall.