EUR/USD: Continued rally unlikely; options indicate

• EUR/USD’s put options draw stronger demand than calls. 
• Investors position for a pullback as Germany announces hard lockdown. 

EUR/USD’s options market has flipped bearish, suggesting low odds of a continued rally in the short-term. 

The one-month risk reversal, which measures the spread between the premium for calls and puts, has dropped to -0.175 – the lowest level since Nov. 2 – having peaked at 0.35 on Dec. 3, according to data source Reuters. 

In other words, the EUR puts or bearish bets are now drawing higher demand (premium) than the calls. Investors seem to be taking hedges against potential decline ahead of the year’s end. 

EUR/USD is currently trading largely unchanged on the day at 1.2133. The currency pair looks to be consolidating in a 1.2060-1.2175 range after breaking out of its $1.16-$1.20 four-month trading band, as noted by Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, in his latest blog post. 

Macro factors such as coronavirus vaccine optimism, expectations for a global economic recovery in 2021, the fading influence of trade protectionism, economic nationalism, and the European Union’s recent agreement on the 2021 budget favor further gains in the EUR. The dollar side of the story looks weak as well, as noted by Morgan Stanley. 

However, Germany’s decision to impose a hard lockdown during the Christmas holidays and potential weak PMIs could play spoilsport in the short-term. The Eurozone, German PMI numbers are scheduled for release this week. 

Technical levels