EUR-USD Resilience Holds Amid ECB Rate Cut Expectations and Market Sentiment

EUR-USD 

The reaction of EUR-USD will largely depend on the message Ms. Lagarde will deliver during her press confidence. If she hints that the pace of rate cuts will slow, as we expect, EUR-USD will probably remain at around current levels. Forward rates are already pricing in almost 100bp worth of easing by December, not far from the 1.75% level we expect for this year. 

Moreover, latest price action shows that, by re-testing the 1.05 area, the euro has probably gained  more resilience to the downside, reducing the risk of a fall towards parity. A similar picture emerges from option- market indicators, such as the 3M risk-reversal rate (25 delta), a measure of the difference in implied volatility  between call and put options for a given maturity and a given delta. 

The index is still negative, favouring EUR-USD put options over calls, but has recovered somewhat from its recent lows.   

 

THE EUR-USD 3M RISK REVERSAL RATE STILL FAVOURS PUT OPTIONS OVER CALLS BUT HAS RISEN

 

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