Market Pricing And Euro Upside Risks
With the European Central Bank’s 25 basis point hike to 2.25% now confirmed, we see the market has already baked this in. Money markets are pricing in a total of 75 basis points of tightening over the coming year. This aggressive pricing creates a high hurdle for any further strength in the Euro. Given this setup, we feel the upside for EUR/USD is capped near the 1.1565/75 resistance level. We are considering selling out-of-the-money call options or implementing bear call spreads to capitalize on this limited potential. Implied volatility is likely to fall now that the event has passed, making option-selling strategies more attractive.Downside Vulnerability And Option Strategies
The downside risk for the Euro has increased, especially after recent US data showed the Producer Price Index rose a stronger-than-expected 0.5% in May. This reinforces dollar strength and makes the EUR/USD pair vulnerable to a drop towards the 1.1500 level. Buying protective put options could be a sensible hedge against such a move in the coming weeks. While Eurozone core inflation remains persistent, recently reported at 2.8% for May, this situation feels similar to past cycles. Historically, once peak policy tightening is fully priced by the market, the currency often struggles to appreciate further. We are treating the current hawkishness as a potential high-water mark for Euro sentiment.Start trading now — click here to create your real VT Markets account.
