Despite recovery attempts, FX traders are facing significant EUR/USD downside risks, which are becoming more expensive to protect. EUR/USD formed a bearish engulfing pattern on Wednesday and Thursday candles: a smaller, white-bodied candle followed by a larger black one.
That signals an end to the latest gains and instead points to further weakness in coming sessions.
The downside risk has been further compounded by Thursday's 78-pip drop on the EBS, the biggest daily fall since April 2.
There has been a degree of panic on Friday as option dealers scramble to cover risk of euro losses and a rise in volatility.
EUR/USD one-month risk reversals have erased all their recently gained premium for EUR calls, while implied volatility has spiked, pointing to an increase in the cost of hedging the downside.
Those long EUR/USD will need the tenkan line, currently at 1.1269, to hold in coming sessions, along with the 1.1258 Fibo -- a 23.6% retrace of the 1.0728 to 1.1422 (April to June) rise.
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