FxWirePro: Bullish/bearish scenarios of EUR/USD in Q1’2019, OTC updates and hedging strategies

Bearish EURUSD scenarios: 

1) US tax reform triggers a larger if lagged repatriation or foreign investment flows; 

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

3) Euro-area growth gets stuck below 2% and ECB begins hiking only in 2020.

Bullish EURUSD scenarios: 

1) Euro growth rebounds 

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

3) Washington issues worsen including fallout from midterms (US trade wars, Mueller 

Investigation).

OTC updates: One can clearly observe that EURUSD skews have been signalling downside risks in 3m tenors that signifies hedgers interest in the OTM put options. 

To substantiate these indications, the RRs for negative bids in the 3m coupled with the above-stated bearish scenarios indicate the bearish options strategies.

Contemplating the prevailing bearish technical environment (in long-term) and most importantly, the positively skewed IVs in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with the bearish risk reversal numbers.

The strategy: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 3M 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. 

Alternatively, shorting futures of mid-month tenors are advocated with a view of arresting further potential slumps. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: sentrix, saxobank

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -31 levels (which is mildly bearish), while hourly USD spot index was at 37 (mildly bullish) while articulating (at 07:21 GMT). 

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