FxWirePro: Bid 2m EUR/USD OTC and deploy diagonal options strips for balanced-hedging ahead of FOMC speeches

EURUSD prices are back under pressure, having failed to break-out stiff resistance at around 1.1450 - 1.1500 areas. We are now developing into a bear channel, with 1.1385 resistance and 1.1280/70 the next support - that ahead of the 1.1215 recent lows.

On medium-term perspective, we view 1.12 - 1.08 as a major support region and the ideal area for a long-term higher low over the 1.0340 lows set in 2016. Notable supports within this region lie at 1.1190 and 1.1000. We need further evidence that 1.1215 was the higher low we are looking for.

OTC Outlook: Please be noted that the positively skewed IVs of EURUSD of 2m tenors signify the hedging interest of bearish risks.While the negative risk reversals of 1-3m tenors indicates bearish risks remain intact in the major trend.

Well, contemplating above-stated driving forces and OTC indications, options strips strategy is advocated on both trading as well as hedging grounds. The options strips strategy which contains 3 legs needs to be maintained with a view to arresting price downside risks.

It’s a quiet calendar today for data releases. Most market interest will probably be on the US Federal Reserve Vice Chairman Richard Clarida at 13:30 GMT, who is a keynote speaker at a New York conference. At the same conference, the Fed’s Esther George, Raphael Bostic and Charles Evans will also speak on a panel at 19:30GMT. Principal interest, however, will be reserved for Fed Chairman Jerome Powell’s speech tomorrow.

The US Conference Board’s consumer confidence report will also be released later today. We expect the headline index to fall to 136.0 in November from 137.9, which would be the first decline since June, perhaps reflecting rising interest rates and falling equity prices. Nevertheless, confidence would still be at historically strong levels, supported in part by a strong labour market.

US 10-year Treasury yields are steady at 3.05% ahead of key Fed speakers today and tomorrow. Markets are looking for clarification of monetary policy beyond the expected increase to 2.5% in December.

Option Strategy: Options Strips
Combination ratio: (2:1)

Rationale: Considering the bullish (in near-term) and bearish technical environment (in long-term) and most importantly, the skews in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with bearish risk reversal numbers.

The execution: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 2M tenors, go long 1m at the money +0.51 delta call option simultaneously.

The strategy can be executed at net debit with a view to arresting FX risks on both sides and likely to derive exponential returns but with more potential on the downside. 

Currency Strength Index: FxWirePro's hourly EUR spot index is showing -61 (which is bearish), while USD is flashing at 107 (which is bullish), while articulating at (09:42 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex