Risk-Reversals Rise in EURUSD

If the latest movements in the options market is anything to go by, EURUSD is at significant risk of reversal lower next week. One-week risk reversals in the Euro have hit their highest level since July ahead of the ECB meeting next week. The initial thinking, that the Fed would cut rates at a faster pace than the ECB, now looks in jeopardy on the back of yesterday’s FOMC minutes and the September jobs report last week.

Fading Fed Easing Forecasts

While expectations for more aggressive ECB easing have risen in recent weeks in line with weakening eurozone data, Fed easing expectations have been dialled back. Indeed, looking at the options data, there has been a big surge in demand for euro puts on the back of Friday’s jobs data.

US Inflation Next

Looking ahead, this current dynamic could be further amplified if we see any upside surprise in today’s US inflation data. Any stickiness or fresh increase in CPI will surely see Fed easing expectations scaled back further, leaving EUR more exposed to downside bets into next week’s ECB meeting. With retail sentiment currently just shy of 90% long, there is plenty of room for EURUSD to push deeper here.

Technical Views

EURUSD

The previously highlighted double top formation is now playing out with the pair breaking below the neckline. The market is now testing the 1.0937 support and retesting the broken bear trend line. This is a key pivot for the market which, if broken, opens the way for a deeper move down to 1.0724 next.