FxWirePro: Data Streaks Weigh on Euro - Spotlight on Eurozone PMIs and Hedging Possibilities

EURUSD has been spiking from the recent lows of 1.0879 to the current 1.1133 levels, but the interim rallies seem to have been exhausted from the last 3-4 days upon overbought sentiments.

Data-wise, the preliminary PMIs in Europe is scheduled (at around 0715 GMT) and US (1345 GMT), while the headline an otherwise light calendar. Service and Manufacturing PMIs are to be announced for French and Germany regions respectively. These are important to track as they are the leading indicator of economic health and the businesses likely to react quickly to the market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy. While Spanish unemployment data is on the table.

Most importantly, watch out for the ECB policy decision (at 1145 GMT) as well. Although we expect quite dovish rhetoric, but with the ECB having already made its move in the previous meeting, do not expect further policy actions for now. Nevertheless, expect some event risk for the EUR intraday.

On the flip side, it would be worth contemplating how much runway there is left for the geopolitical events to pan out. The positive Brexit story looks to be in the closing chapters, leaving the more inherently hairy and uncertain Sino-US developments as the main geopolitical driver ahead. If there are no new headlines on that front, we may revert to

trading off relative macro and central bank dynamics.

The failure to breach the 1.1100 level on the downside may keep the EURUSD buoyant for now. Meanwhile, topside should be capped at 1.1180. Intraday, we do not rule out some implicit heaviness if European preliminary PMIs remain soggy or if the ECB tune up on the dovish rhetoric.

The September meeting of the ECB Governing Council saw the central bank move back on to a clear policy loosening path. The deposit rate was cut by 10bps from –0.4% to –0.5%, in line with market expectations. Meantime, the ECB also indicated that it would restart it QE asset purchase programme in November. Let’s now quickly glance through OTC outlook of EURUSD.

Strategic Recommendations: 

EURUSD: At spot reference (EURUSD): 1.1175 levels, contemplating above technical rationale, we advocated initiating longs in EURUSD futures contracts of October’19 delivery as further upside risks are foreseen and simultaneously, shorts in futures of November’19 delivery for the major downtrend. Thereby, one could directionally position in their FX exposures on hedging grounds. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately.

EURGBP: 3-way options straddle versus ITM calls strategy is advocated that seem to be the most suitable for EURGBP contemplating above factors. The strategy comprises of at the money +0.51 delta call and at the money -0.49 delta put options of 2m tenors, simultaneously, short (1%) ITM puts of 1w tenors. The strategy could be executed at net debit but with a reduced trading cost.

EURJPY, on the hand, has resumed bearish trend and we advocated shorts in futures contracts of mid-month tenors with a view to arresting potential dips.