FxWirePro: How to tackle lingering skepticism in EURUSD? Nudging up projections via call ladders for minor hic-ups in robust major trend

When entire universe foresees EURUSD still higher through 2018, we at FxWirePro suspect minor obstacles complicated by US inflation, US politics & an ECB response.

Unless one makes a habit of being contrarian as an attention-seeking tactic, it is difficult to credibly propose non-consensus views very often. A bullish outlook on the euro for 2017 was one of our occasional ones, though we underestimated how quickly the currency could rise above 1.15.

Do you think that the recent pace of euro gains was unsustainable? Our recent technical section on this pair did not rule out a minor bearish sentiment amid robust uptrend, a significant level which now fast approaching (upper bound of the past range, 2015 and 2016 peak).

However, past euro weakness essentially coincided with ECB QE, which still has to be reversed, a move that should propel EURUSD towards 1.20.

Only because Draghi did not use the opportunity last week to refer to the current EUR strength does not mean that he is totally relaxed about the development of the exchange rates. Moreover next week Thursday’s meeting is a much better opportunity to talk about these developments. After all the ECB will then be publishing new projections. And in view of a trade weighted appreciation of just above 7% since April it is not unlikely that the exchange rate has already had an effect on the growth and above all inflation projections of the central bank.

Also, euro area GDP confirmed the broadening economic upturn, supporting a stronger euro into year-end. So the EURUSD pullback should be temporary and a buying opportunity.

Defused bearishness:

EURUSD is consolidating as it is digesting several risks which are thus losing their potential of bearish surprises, limiting the extension of the pullback:

FOMC minutes confirmed the growing expectations of the Fed putting balance sheet reduction ahead of rate hikes in the next few months. This should have much less FX impact than actual Fed Funds hikes.

ECB minutes expressed concerns about “the risk of the FX rate overshooting in the future”.

Getting leverage despite a slower market timing The EUR/USD appreciation is now going to be slower than it has recently been, and the skew is still undecided whether volatility should rise on the back of a higher or lower spot. As such, we do not focus on intermediary vega gains to favour instead a buy-and-hold structure benefiting from the passage of time, as the timing of euro upside is less certain. 

The EURUSD appreciation has reached newer highs, those who’ve been dubious for further gains and thinks that pace is now going to be slower than it has recently been, and the skew is still undecided whether volatility should rise on the back of a higher or lower spot.

As such, we do not focus on intermediary Vega gains to favor instead a buy-and-hold structure benefiting from the passage of time, as the timing of euro upside is less certain.

Mechanics: Buy EURUSD 3m ladder, strikes 1.19/1.21/1.24 Indicative offer: 0.35% (vs 1.15% for the call strike 1.19 only, spot ref: 1.1945).