EUR/USD: Put premium continues to slide ahead of the ECB meeting

• EUR/USD risk reversals continue to rise on falling put demand.
• The European Central Bank (ECB) is expected to keep rates unchanged.
• The EUR could rise sharply if Draghi signals at least one rate increase in 2019 is still on the table.

Risk reversals on EUR/USD, a gauge of calls to puts on the common currency, has jumped to six-month highs, indicating investors are trimming bearish bets to position for a rally in the EUR.

The one-month 25 delta risk reversals (EUR1MRR) are currently trading at -0.35 in favor puts – a level last seen on June 7. Notably, the gauge stood at -1.10 on Oct. 29, meaning the implied volatility premium or the demand for put options has dropped sharply over the last five weeks.

More importantly, put demand has hit six-month lows ahead of the ECB rate decision. It appears as though investors are expecting Draghi to say that at least one rate increase in 2019 is still on the table.

That would indeed push the US-German yield differential to fresh multi-month lows, leading to a broad-based rally in the EUR.

However, both the risk reversals and the common currency could take a beating if Draghi sounds dovish, forcing markets to scale back expectations of 2019 liftoff.

EUR1MRR

EUR/USD Technical Levels