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Dec 14 - 05:55 AM

EUR/USD - COMMENT-Don't Bet The House On Post-Fed EUR/USD Losses

By Richard Pace  —  Dec 14 - 03:59 AM

Markets are primed for a hawkish U.S Federal Reserve announcement on Wednesday, which should benefit the USD versus lower-yielding funding currencies such as EUR, but positioning and derivative pricing suggests deeper EUR/USD declines are not certain.

The Fed is widely expected to announce a doubling of asset purchase tapering to $30-billion per month, which could see markets bring forward expectations of subsequent rate hikes.

Current OIS pricing has the first full 25bpts hike in June and the second by November, with a total of 65bpts priced by December 2022 FEDWATCH.
The median Fed dots could edge up to reinforce those predictions, with focus also on the number of Fed dots for 2023-4.

However, with the market already long USD on expectations of a hawkish outcome, there's more risk of position reductions thereafter, especially before the traditional Christmas lull and year-end.

EUR/USD FX option implied volatility remains underpinned to reflect the near-term risk of increased actual volatility on which it thrives, but additional premium for EUR puts over calls (the right to sell EUR/USD versus buy it) has been unwound.
One-month expiry 25 delta risk reversals show this downside strike premium reaching 18-month highs at 0.6 in mid November, before being totally erased by early December. nL1N2SU0H8 Related nL1N2SU0H8

For more click on FXBUZ

1-week and 1-month expiry EUR/USD FX option implied volatility Click here

1-month expiry EUR/USD option risk reversals Click here

Refinitiv IFR Research/Market Commentary


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