On 22 July, the primary foreign exchange option expiry to consider is EUR/USD at the 1.1700 level. The euro has recently strengthened against the dollar, with a shift toward a more bullish market sentiment.
This change potentially gives buyers more influence; however, in the absence of major catalysts, options expiries might restrain gains during the session. Market focus is returning to the TACO strategy as the 1 August trade deadline approaches, posing a concern for the dollar amidst the recent short squeeze.
Impact Of Eur/USD Option Expiry
We see the large EUR/USD option expiry noted by Low as a potential short-term magnet for the currency pair. This can act as a form of gravity, limiting price movement for the day as market makers hedge their positions around that level. However, we believe traders should look past this daily event and focus on the underlying trend change he identified.
The dollar’s recent rally, which squeezed out many short positions, appears to be losing momentum. According to the latest CFTC data, speculative net long positions in the U.S. dollar have decreased for five consecutive weeks from their recent peak. This unwinding of a crowded trade suggests the path of least resistance for the greenback may now be lower.
Return To The Taco Playbook
We believe the market is shifting back to what the author calls the “TACO playbook,” where major economic themes dictate direction. With Eurozone inflation hitting a record 9.1% in August, the European Central Bank is now under immense pressure to hike rates aggressively. This is a significant change from just a few months ago and alters the relative interest rate outlook against the United States.
Given this backdrop, implied volatility in the currency markets is likely to rise from its recent lows. The Deutsche Bank Currency Volatility Index has already risen more than 25% from its June bottom, and we expect this trend to continue as central banks diverge. Traders should therefore be cautious about strategies that involve selling options, as a pickup in price swings could lead to significant losses.
To position for the more bullish bias mentioned in the initial analysis, we think buying EUR/USD call options is a prudent strategy. For instance, purchasing calls with strike prices above the current market for the coming weeks provides a defined-risk way to profit from a continued rally. This approach allows traders to capitalize on a weaker dollar without the unlimited downside of a direct long position in the spot market.
