FxWirePro: Key driving forces of ECB rate projections and EUR options trading tips

Quite a few stuffs in life are just unpleasant; similarly, the PMIs for the euro zone are likely to be for ECB governor Mario Draghi. Admittedly they all three, the one for manufacturing, services and the composite index, remain above the 50 level, thus signalling continued expansion. 

Nevertheless, they have been dropping since the beginning of the year and decisively, should end their downtrend. If the trend continues in early 2019, ECB concerns about the economic development of the euro zone might increase. If one adds the effect of the falling oil price – the next unpleasant development for Draghi – which suggests that inflation rates will fall again, the reasons for a first-rate step in late 2019 begin to disappear. The market has already become much more sceptical in this respect. In that case Draghi would not be able to claim when he steps down in October 2019 that the first-rate hike since 2011 happened under his leadership. 

With a continued fall in the PMIs and oil prices the euro would lose the best argument in its support: the fact that the normalisation process will start in 2019. Depending on the data the ECB might change its forward guidance during the first months of the New Year. Draghi himself provided the first indication recently even if he continues to underline that some weakening of growth is normal at the end of an expansionary cycle, as he did yesterday in front of the EU parliament. But the ECB does still have to sound positive for now as it wants to or rather has to end the asset purchases by year-end. That means we are only likely to hear the first cautious ECB comments at the start of next year, if economic data continues to disappoint. At the start of the week the German ifo index disappointed and on Friday euro zone inflation data for November is due for publication. Another two unfavourable developments that are likely to fuel doubts about the ECB’s normalisation process. Consequently, the euro is likely to struggle this week to establish itself above 1.14, since there simply aren’t enough arguments in its favour.

Trading tips:

We added GBP longs vs EUR through options on recent Brexit developments.

Buy 2m 1x1.5 EUR put/GBP call 0.87-0.8550 RKI 0.84 for 38.9bp (spot ref: 0.8866 levels).

Buy 3M EURUSD 1.08/1.12 put spread vs sell 50:50 mix of EURSEK 9.90/10.21 put spread.

Uphold EURNZD 1.65/1.717 put spread and

Buy 2M 25 delta EURSGD put vs short 2M 25 delta USDSGD put.

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -94 levels (which is bearish), while hourly USD spot index was at 141 (bullish) and GBP at -116 (bearish) while articulating (at 07:56 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex