The options market shows that investors are hedging against the risk of further ** and increased volatility in the euro.
Ahead of next week's ECB policy meeting, traders are betting on a weaker euro and increased volatility. Any **leaning or weaker economy** of the central bank at the meeting could hit the euro further.
EURUSD fell to its lowest point in a week on Wednesday as the options market suggests investors are now hedging the risk of further**. The one-week risk reversal indicator for the pair shows thatTraders are at their most bearish level for the euro in more than three weeks. Risk reversal is a barometer of ** and sentiment.
At the same time,Bets on the volatility of EUR/USD in the coming week saw their biggest gains this year, which could swell further on Thursday, when the contract's expiration date will coincide with the ECB meeting.
Although the ECB is widely expected to keep interest rates unchanged, it will release an update on inflation and growth**. The market expects the central bank to cut interest rates faster and more quickly this year than in the United States. In contrast, the U.S. economy is faring much better.
Brown Brothers Harriman & Co., which includes Win Thin"The risk is that the ECB cuts interest rates before June, which should limit the euro's growth," strategists wrote in a note. They noted that the eurozone confidence index unexpectedly deteriorated on Wednesday, which was "in line with the poor performance of economic activity in the eurozone."
As the financial calendar gets busier ahead, options traders are also increasing their exposure to volatility in other contracts. EURUSD's two-week implied volatility, which covers the ECB's interest rate decision and US inflation data for February on 12 March, is on the verge of its biggest two-day gain since November.
Key data to be released this week include Eurozone inflation and the US personal consumption expenditures deflator, the latter being the Fed's preferred inflation gauge.
The risk of further signs of recovery in the US economy has traders particularly bearish on the near-term outlook for the euro. In short-term contracts of up to 6 months, the demand for US dollar call options is more pronounced.