FX Buzz is a commentary and analysis service.
The writers' views are their own.
LONDON, April 24 (Reuters) - The euro stormed into 2018 in rally mode as traders bet that synchronized global growth would force the European Central Bank to accelerate monetary policy normalization, but the ECB's reluctance so far to signal any shift leaves EUR/USD's gains vulnerable to setbacks.
That probably won't change at this week's meeting or, even, at any of the ECB's other gatherings until September as it seeks to cool bullish currency speculation on concerns that a stronger euro will effectively tighten conditions before officials get the chance to adjust policy.
But that doesn't mean those betting on a further euro rise are long and wrong -- just that their timing is off by a few months.
A EUR/USD pullback to correct the huge number of long positions is probable before it resumes the rally in earnest in the autumn.
As they bide their time, some traders might adopt strategies that take advantage of superior U.S. yields, but they could also be willing to establish fresh long positions if the pair retreats towards 1.2000-1.2100.
EUR/USD ranges have narrowed within the 1.2155-1.2556 extremes established since the end of January.
As a result volatility has fallen.
Last week benchmark 1-month EUR/USD vol traded below 6, within touching distance of the lows seen since December 2017 when EUR/USD was around 1.1800.
Such low option vol is a strong indication that traders, who are long 19.2 billion euros, are not going to see a resumption of the trend anytime soon.
But holding onto those long positions will incur a heavy cost if they sit on their hands because without any FX movement they're losing money by the day.
Indeed, higher U.S. rates mean a EUR/USD long costs 28 pips per month, a loss of more than 1% by the September ECB if EUR/USD remains near its current level.
That difference in underlying interest rates also makes EUR/USD an appealing sell-on-strength play for investors during the period ahead of September's ECB meeting.
Low volatility means little movement and so limited FX risk to eat into the carry that can be earned by holding onto dollars over the next few months.
Should long liquidation depress EUR/USD any carry earned will be enhanced by FX movement.
And as all of the EUR 2.3 billion purchased between April 3-17 are now underwater some paring of bullish bets is assured.
That said, the bull trend is strong, with the current consolidation occurring close to the peak of a 19 percent rise, even though traders are holding huge topside bets.
While a correction looks likely, it may not be that deep.
The lengthy period of sideways trading has allowed traders to amply hedge EUR/USD moves in any direction, evidenced by the huge size of option expiries that are reported on an almost daily basis.
Hedging for these options and the bigger influence of barrier defences at 1.2100 and 1.2000 will lend EUR/USD a lot of support, leaving a low probability of a sustained move below the 200-DMA currently at 1.2000.
The cost of interest rates for cash longs established at 1.21 or lower could be more than offset if the pair moves back to the centre of the 1.20-1.26 range later in the summer when hawkish speculation is likely to be rekindled ahead of September's ECB meeting.
A break over 1.2600, which should reach 1.30/1.31 at a minimum, is more likely if the number of EUR/USD longs are significantly pared during any drop toward 1.20-1.21.
COLUMN-Sterling rally running toward Brexit brick wall: Boulton nL1N1RW0O7
COLUMN-The great 2018 dollar rout needs new fuel: Clark nL1N1RQ1EU
COLUMN-Jittery markets may yet be dollar's best friend: Clark
EUR/USD and forwards, vol and positions Click here
(Editing by Burton Frierson)
(Reuters Messaging: )
(( ; 02075428780; Reuters Messaging: Reuters Messaging: jeremy.boulton.thomsonreuters.com@reuters.)