markets

Traders Are Souring on Euro Before Fed and ECB Go Head-to-Head

  • Risk reversals show euro puts exceed calls over all tenors
  • ECB bond-buying announcement won’t support euro, Sinche says
Fed, ECB to Decide as Markets Watch Paths to Normalization

Currency traders are wagering that even a potential European Central Bank announcement on its timing for ending bond purchases will fail to keep the euro rallying.

The euro is on track to gain about 1 percent this week versus the dollar, for its best performance since February. While it’s perked up from the weakest levels of 2018 on signals from officials that the ECB is about to debate when to taper stimulus, the options market is demonstrating little confidence in the shared currency’s outlook.

Risk reversals for the euro -- a put-call barometer of positioning and sentiment -- are below par for all maturities. That indicates investors are paying an added premium to protect against euro weakness versus the dollar heading into a week when both the Federal Reserve and ECB are set to hold meetings.

“We’ve gotten what we’re going to get out of the ECB announcement in terms of euro upside,” said Robert Sinche, global strategist at Amherst Pierpont Securities LLC. “Going into the second half of the year, the markets will have to come to grips with the fact that the ECB announcement next week -- if it comes -- is likely to be their last policy move for potentially a year.”

Traders are even more skeptical regarding the euro’s prospects looking ahead to 2019: The premium for one-year euro-dollar puts relative to one-month puts is close to the widest point this year.

While the median forecast is for the euro to rise to $1.22 by year-end from $1.1770 currently, banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. have cut their targets in recent weeks.

Sinche expects next week’s central-bank schedule to reinvigorate the dollar, which has stalled this week after a seven-week rally. The Fed is expected to raise rates Wednesday and reiterate plans to keep hiking in 2018, before the ECB meets Thursday. At this point, traders don’t expect the ECB to actually raise rates until after mid-2019.

“The Fed really takes the leadership role here again,” Sinche said. “We think by the September Fed rate hike, we’ll have established a $1.10 to $1.15 range for euro-dollar.”

— With assistance by John Ainger

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