FxWirePro: Bullish/bearish scenarios, OTC indications of EUR/USD and hedging strategies on potential risk events

Bearish EURUSD scenarios: 

1) A loss of confidence in Italian fiscal policy that pushes BTP spreads to 400bp and undermines banks, 

2) A resumption of the EM sell-off boosts USD due to the prevalence of cross-border FX funding in USD. 

3) Growth gets stuck below 2% and ECB hikes only in 2020 

Bullish EURUSD scenarios: 

1) Growth rebounds to 2.5-by end-2018; 

2) ECB becomes more comfortable with progress on wages and core inflation and softens its calendar guidance for hikes 

Latent trigger events:

Growth and inflation data. 

ECB policy 

Italian fiscal situation (EU Commission response late Oct, ratings agencies)

Global risk markets, EM, US trade policy.

OTC Outlook: Please be noted that the positively skewed IVs of EURUSD of 2m tenors signify the hedging interest of bearish risks.

While the risk reversals across all tenors show shift towards positive numbers but downside risks remain intact in the major trend, bearish risk sentiment remains intact.

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. You could observe mounting hedging operations in EURUSD (highest among G7 FX space).

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 2m 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 1 (which is absolutely neutral), while USD is flashing at 122 (which is bullish), while articulating at (09:18 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex