Euro Hits One-Month Low as Confidence Shaken After German Vote

  • Trailing stops hit as euro fails to gain from risk-off mood
  • Yellen speech, pivotal level at $1.1823 come into focus

German Election Result Sees Euro Moving Lower

The euro dropped toward $1.1800 as investors continued to unwind long positions, with fresh tactical selling pressure setting in ahead of a speech by the Federal Reserve Chair Janet Yellen later Tuesday.

What started off as a knee-jerk reaction after the German election now appears to have become a broader hit on euro bulls’ conviction. Concern that the European Central Bank may not shed sufficient light on stimulus tapering even at its next meeting is weighing on the sentiment, amid growing speculation that the $1.20 level marks the limit of the central bank’s tolerance for gains in the common currency for now.

Investors with medium-term euro exposure saw value in trimming their longs given the Fed’s latest hawkish tilt, talk of U.S. tax reforms and the odds that the ECB will keep the bar low at its Oct. 26 meeting, according to currency traders in Europe and London. The euro’s inability to stage a significant rally during the most recent war of words between the U.S. and North Korea also raised doubts whether it can re-test $1.20 level soon enough.

Technical models joined the selling side as euro-dollar breached support after support and slipped to a low of $1.1810, a level unseen since Aug. 25. Stops on euro longs were triggered across the board, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.

Still, the divergence in price action between the spot market and options suggests that headwinds faced by the euro may prove short-lived, even if it extends declines in the short term. Risk reversals on all tenors up to one year may have taken a hit this week, yet they still trade above par.

  • EUR/USD was down 0.2% at 1.1821 as of 10:30 a.m. London; the Bloomberg Dollar Spot Index gained a second day and was up 0.1% on Tuesday
    • Stops lay below 1.1800 in EUR/USD, mixed with fading interest: traders
    • Traders now focus at 1.1823, the low on Aug. 31; a close below reinforces technical view that a visit down to 1.1600 cannot be excluded
    • The pair feels the heat from EUR/GBP that breached double-bottom support and touches its lowest level in more than two months at 0.8758, risking a correction down to 0.8693
    • As a result, sterling was the only G-10 currency gaining versus the greenback 
  • One-month implied volatility in euro crosses surged as the tenor now captured the ECB’s meeting next month; euro-dollar on the tenor rose by the most in three months and hit its strongest level since Sept. 7 at 8.54%
    • Breakeven on the ECB’s October 26 meeting now trades at near 230 USD pips, which suggests the euro may keep trading within its range since late July
  • Kiwi led losses, while yen also failed to hold on its early gains, fueled by renewed worries over the Korean peninsula
  • Alongside Yellen, speeches by other Fed members include Minneapolis President Kashkari and Governor Lael Brainard
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