The forward-looking nature of FX options offers insight into expectations for currencies, and they warn of the risk of further near-term setbacks/consolidation for EUR/USD.
Dealers had plenty of time to prepare for the breach of huge 1.2000 option barriers, which had raised the risk of profit-taking in spot and options when they were finally erased on Tuesday nL1N2FX07Y.
However, that break coincided with strong U.S. data and comments from European Central Bank chief economist Philip Lane that exchange rates matter, prompting an accelerated setback.
EUR/USD options have a strong correlation with spot and have been quick to turn lower.
Benchmark one-month implied volatility posted recent highs at 8.4 Tuesday, but sold 7.7 since.
The premium for EUR calls over puts (topside strikes) on one-month risk reversals fell to 0.55 from 0.75.
Outright trade flows show increased demand for options that give holders the right to sell EUR/USD at marginally lower levels over coming sessions - 1.1800 strikes stand out.
Impending U.S data heightens risk of further profit-taking if strong nL1N2FZ06H.
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