Euro Erases Draghi-Fueled Drop as Cross-Price Action Supports

  • French vote hedging caps gain as one-month put premiums surge
  • China-U.S. summit, Fed balance sheet normalization in focus

Draghi: No Need to Deviate on Policy Guidance Wording

The euro steadied after dropping to the lowest since mid-March following dovish remarks from Mario Draghi and option hedging before the French elections that weighed on the currency.

The shared currency slid earlier as the European Central Bank president said that a pick-up in inflation across the euro area isn’t yet strong enough and that “a reassessment of the current monetary policy stance is not warranted at this stage.” These comments, which push back against recent speculation about ECB tightening and calls from German banks to scale back bond purchases, led to fresh selling interest by interbank and leveraged accounts.

Macro investors also helped to clear bidding interest above $1.0635, foreign-exchange traders in Europe and Asia said. The common currency erased losses versus the greenback as cross action supported.

“Most of Draghi’s comments may already be in the euro price after last week’s correction but a realization of a cautious ECB could be the final hit to lingering euro bulls ahead of the April ECB meeting,” according to Viraj Patel, a London-based foreign-exchange strategist at ING Groep NV.

The euro was initially higher for the day and it could have moved above offers near $1.0700 had it not been capped by sellers through options, according to the traders, who asked not to be identified as they weren’t authorized to speak publicly. The one-month tenor in option structures captured the second round of the French presidential elections for the first time and fresh hedging coupled with rolling over of low-delta euro puts has also pressured the currency.

Hedging interest had been mainly manifested versus the yen, where risk reversals nosedived to the most euro-bearish sentiment since June. Implied volatility in euro-yen rose above 15 percent, the highest in eight months. The premium for Euro-Swiss franc puts over calls stood at 2.48 percentage points, up from 1.27 percentage points Wednesday; this move marked the most bearish euro sentiment on the cross since June.

  • The euro was little changed at $1.0665 as of 11:04 a.m. in London, after falling to $1.0629; support lies at $1.0600-03, the lows on March 14-15; option-related bids ahead of $1.0600 expiries could also cap dollar gains for now
    • The common currency found support from reversal in EUR/GBP that stands little changed at 0.8553; the pound is steady at $1.2478 as it looks to test its 55-DMA support, currently at $1.2435, for the fifth time in last seven days
    • EUR/JPY reverses drop of as much as 0.6% to stand 0.1% higher at 118.15; a close below 118.05 will mark the longest losing streak for the pair in nearly five years
  • The Bloomberg Dollar Spot Index rises 0.1% as traders look to assess the impact of Fed balance-sheet normalization on interest-rate hike cycle for 2017 while focus is also placed on the possible news out of the U.S.-China summit later Thursday
    • BBDXY tests its 21-DMA a second day; it has closed below since the Fed meeting in mid-March prompted further unwinds of dollar longs across the board
    • AUD/USD led losses among G-10 bloc, down 0.3% at 0.7547 as macro investors interest to add shorts filled sell stops: trader

— With assistance by Stefania Spezzati

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