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Price action in FX options would suggest that traders of this derivative see a lower risk of a big fall in EUR/USD, but that does not mean that new gains are imminent.
Risk reversals are an option contract that benefit from increased volatility in a particular direction.
They can show how option dealers might perceive the directional risk of a currency pair.
EUR/USD risk reversals have seen their long standing EUR put/USD call volatility premium (the right to sell EUR/USD versus buy it), trending lower.
The benchmark 1-month expiry 25 delta risk reversal premium for EUR puts over calls has halved to 0.425 since mid February and is now just 0.2 above January's one-year lows at 0.225, with a similar decline in the three-month expiry contract.
Dealers also report option users selling EUR/USD downside strikes and broader implied volatility more generally recently, which is reflected in declines along the 1-12-month expiry EUR/USD implied volatility curve.
While this price action fits with EUR/USD holding recent ranges of late, buyers are starting to take advantage of the lower levels.
That fits with a higher risk of actual volatility surrounding the significant U.S. data that can shape the size of the U.S. rate hike expected on March 22.
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