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  • EUR/USD three-month risk reversal shows strongest bearish bias since June 2020. 
  • Technical charts and macro factors look to have aligned in favor of the bears. 
  • German Factory Orders are forecast to contract 1% in December. 

EUR/USD’s options market positioning looks stacked against the single currency. 

According to data source Reuters, the three-month risk reversal shows an implied volatility premium for puts over calls at an eight-month high (of -0.275). In other words, the bearish bias is strongest since June 2020. 

The negative risk reversal is the result of demand for puts outstripping demand for calls. The metric flipped bearish with a drop below zero on Jan. 27. 

A put option gives the holder the right but not obligation to sell the underlying asset at a predetermined price on or before a specific date. Meanwhile, a call represents the right to buy. 

The increased demand for puts highlighted by risk reversals is consistent with the bearish developments on technical charts, which indicate scope for a continued decline toward 1.1888. That’s the 61.8% Fibonacci retracement of the rally from 1.1602 to 1.2349. 

The macro factors are also biased bearish. The battered dollar is rising with progress in coronavirus vaccinations, the US President Joe Biden’s unveiling of a $1.9 trillion fiscal stimulus, and upbeat economic data.  Meanwhile, concerns about the Eurozone’s slow delivery of coronavirus vaccines look to be weighing over the euro. 

EUR/USD’s downside will likely gather pace if the data due at 07:00 GMT shows a bigger-than-expected contraction in the German Factory Orders growth in December. The US Nonfarm Payrolls due at 13:30 GMT is expected to show the economy added 50K jobs in January, having shed 140K jobs in December. Again, a big beat on expectations could draw stronger buying pressure for the dollar. 

Technical levels