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The EUR/USD rally is stretched, volatility has slumped, traders are heavily long and interest rates are expected to remain biased in favour of the dollar throughout 2023, so those hedging should insure against the substantial risk of a drop.

The big drop in volatility is a warning sign to the large number of traders betting on a rise of diminishing upside potential, and the likelihood that any rise unfolds slowly, if at all.

Interest rate differentials that favour the dollar will erode potential profits for those betting on a rise, and because many of them are following techs, they should also be wary about the stretched rally, and high risk of a reversal.

For those not speculating, a strategy to hedge downside risk seems wise and low option vols and favourable interest rates will cheapen the cost of doing so.
Those protecting against a drop are also doing so at lofty levels, near 2023's high and circa 1,500 points above last September's low.

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