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EUR: Reconnecting and Awaiting Central Bank Meetings

EUR: Reconnecting and Awaiting Central Bank Meetings
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  1. EUR: Reconnecting

    EUR: Reconnecting

    Yesterday's drop in EUR/USD looked to be a function of the sharp drop in US initial jobless claims – pointing to a firm jobs market – but perhaps also some FX options-related flows given a lot of the move came after the 16CET FX option expires. The EUR/USD drop did, however, see EUR/USD reconnect both with short-term rate differentials (still wide at nearly 130bp in the dollar's favour) and also the still steeply inverted US yield curve. Both of these variables have to change if the EUR/USD is to embark on a big cyclical rally.

    On the subject of the FX options markets, it seems investors have yet to cross the bullish Rubicon for the EUR/USD. Looking at the risk reversal – or the price for a 25 delta EUR call option over an equivalent EUR put option – the risk reversal continues to favour EUR puts. The one-month risk reversal has not favoured EUR calls since early 2022 and a switch by investors back to favouring EUR calls would represent an important sentiment shift.

    Back to today, EUR/USD could drift down to support at 1.1100/1115 but that may well be the lower end of the range heading into next week's central bank meetings.


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