EUR/USD: Pennant intact, bearish outside-day fails to revive Put deman

• EUR/USD created bearish outside-day yesterday, raising the risk of a downside break of pennant pattern.
• Bearish candlestick pattern has failed to revive interest in EUR puts (bearish options).

The EUR/USD created a big bearish outside-day candle yesterday after ECB’s Draghi reiterated that interest rates ill stay where they are through summer 2019.

The sharp drop from 1.1744 to 1.1640 indicates the markets were likely expecting Draghi to up the ante on policy tightening in the wake of EU-US trade deal and may have been disappointed by Draghi’s warning that protectionism is a prominent uncertainty.

The fall could also be associated with CNY’s decline. Whatever the reason, the EUR’s slide from 1.1744 to 1.1640 (bearish outside-day candle) has shifted risk in favor of a downside break of the pennant pattern.

Still, there are no signs of nervousness in the options market. For instance, the one-month 25 delta risk reversals (EUR1MRR) climbed to -0.575 yesterday from the previous day’s reading of -0.625, indicating a drop in demand (drop in implied volatility premium) for the cheap out-of-the-money EUR put options (bearish bets/Sell EUR). As of writing, risk reversals stand at -0.575.

The options data calls for caution on the part of the aggressive EUR bears. That said, an above-forecast GDP reading (due today) could yield a downside break of pennant pattern, boosting demand for the EUR puts.

EUR/USD Technical Levels

Key resistance: 1.1678 (50-day MA + 5-day MA + 10-day MA), 1.1744 (previous day’s high + pennant hurdle), 1.1791 (July 9 high).

Key support: 1.1640 (previous day’s low), 1.1593 (previous day’s low), 1.1508 (June 21 low).