- EUR/USD’s risk reversals drop to a three-month low on put demand.
- Put options represent right to sell euros at a predetermined rate.
- Investors anticipate deeper decline in the common currency.
- The bulls need a better-than-expected German IFO to stall the sell-off.
EUR/USD’s options market, which flipped bearish earlier this week, now shows the strongest EUR-negative bias in at least three months.
One-month EUR/USD risk reversals, a gauge of calls to puts on the common currency, fell to -0.30 on Wednesday, the lowest level since June 19, as investors rushed to buy insurance (put options) against weakness in the common currency.
In other words, investors foresee the euro trading under pressure over the next four weeks.
EUR/USD hits two-month low
The increased demand for put options, as highlighted by risk reversals, could be attributed to EUR/USD’s drop to two-month lows.
The currency pair fell to 1.1651 on Wednesday, the lowest level since July 27, despite a better-than-expected German Manufacturing PMI.
EUR/USD is currently trading near 1.1660, representing a 2.3% decline on a month-to-date basis. The pair has shed more than 200 pips in the last three days on a broad-based US dollar rally.
Technical charts indicate scope for a further slide toward 1.15. However, the common currency may find a floor well above 1.15 if the forward-looking German IFO Expectations Index for September, scheduled for release at 08:00 GMT on Thursday, blows past expectations.
The index is seen rising to 98.00 from August’s 97.5. The pair may also take cues from the Business Climate and Current Assessment indices. Later, the focus would shift to the Federal Reserve Chairman Jerome Powell’s testimony, speech by the US Treasury Secretary Mnuchin, and the US weekly jobless claims data.