Non-farm payrolls may help the US dollar turn the tables, options traders turn bearish on the Euro
Option traders' bearish sentiment towards the Euro has increased, with the Euro falling below zero in the one-month period against the US Dollar, indicating an increased risk of Euro depreciation. With the potential improvement in US employment data, market expectations for a Fed rate cut have decreased, providing support for the US Dollar. Analysts believe that strong US employment data will weaken Euro long positions and boost the US Dollar
Option traders have turned bearish on the euro as the currency's rally to a one-year high may be losing momentum.
The one-month risk reversal for the euro against the dollar has dropped below zero, indicating an increasing premium to guard against euro depreciation.
This indicator is seen as a barometer of market positioning and sentiment, expanding last week to levels most favorable for the euro since the end of 2020.
"The decline in the euro-dollar risk reversal indicator suggests that the market is becoming increasingly concerned about the sustainability of the uptrend," said Kristoffer Kjaer Lumholt, head of foreign exchange research at Danske Bank in Copenhagen. He added, "Any further upside is a good opportunity to sell the euro."
The euro's rally has started to lose steam, falling to 1.1042 against the dollar on Monday, the lowest level since August 19, after surging to a one-year high of 1.1202 last week.
Improvements in U.S. employment data expected later this week could add downward pressure, weakening expectations of a significant Fed rate cut in the coming months, which has recently weighed on the dollar.
Investors poured into the euro last month, with hedge funds' bets on euro strength reaching the highest level in over a year last week, according to CFTC data.
While many in the market have been betting on the euro to rise against the dollar, speculating that the ECB's rate cuts this year may be less than the Fed's, these bets may be questioned.
Elias Haddad, senior market strategist at Brown Brothers Harriman, stated that a strong U.S. employment report could reduce expectations of a 100-basis-point Fed rate cut before the end of the year. Meanwhile, after the ECB's first rate cut in early June, with another cut expected in September, investors anticipate at least one more rate cut by the end of the year.
"If this week's U.S. employment data shows a soft landing in the labor market, federal funds futures should rise, benefiting the dollar and reducing speculative long positions in the euro," Haddad said