By their forward-looking nature, FX options can offer clues on the outlook for EUR/USD, and although currently leaning bullish, price action suggests further gains could prove hard fought.
Risk reversals are a sentiment gauge that are easy to follow.
They typically hold a premium for options in the perceived direction of travel.
Sub 1-month expiries regained a recently lost premium for EUR calls (topside) before 1.2200 barriers were erased early Wednesday nL1N2IW0FP, which will support implied volatility as EUR/USD gains.
However, that premium remains below recent highs and related demand for implied volatility is still limited.
It suggests the market is already long of topside options and might also reflect the presence of barrier options.
Related option cash hedging and outright defence of the barriers can slow any bullish advance.
Barriers typically reside on round numbers and 50-pip intervals.
It's worth watching one-week-one-month risk reversals and implied volatility for any price increase, which would suggest dealers are growing concerned that EUR/USD gains will pick up pace, while setbacks would signal another near-term top is in place.
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