FxWirePro: ECB hawks disappear – Place EUR/USD diagonal options strips on dovish rhetoric

ECB’s Mario Draghi’s press conference yesterday did not help the euro. European central bank’s President modestly seemed too pessimistic for that: growth and inflation forecasts revised down, warnings of global risks. On the other hand, he could have sounded even more dovish. New long-term tenders do not seem to be an immediate issue. The ECB’s rhetoric was sufficient to ensure that the official announcement of QE measures ending was not seen as a hawkish signal by anyone. With such a skilful communicator at its helm the ECB does not need to take any strong material actions to achieve what it wants. Although yesterday’s press conference did not constitute a negative signal for the EUR exchange rates in the long run, some pressures could be foreseen. 

On a broader perspective, we view EURUSD at 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. 

FX Derivatives Strategy: Options Strips
Combination ratio: (2:1)

Rationale: EURUSD skews have been well-balanced on either side that signifies hedgers interest in both OTM put and OTM call options.

Contemplating above fundamental factors and the RRs for positive bids in the near-term and bearish technical environment (in long-term) and most importantly, the positively skewed IVs in the sensitivity tool coupled with bearish risk reversal numbers indicate more biased towards downside risks.

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. 

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.

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -63 levels (which is bearish), while hourly USD spot index was at 79 (bullish) while articulating (at 11:54 GMT). 

For more details on the index, please refer below weblink:

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