EUR/USD hit new lows since March 31 at 1.1500 early Monday but failed to close below the key 76.4% Fibonacci retracement of the March-April rally from 1.1409 to 1.1849 at 1.1513. That failure and subsequent recovery to the 1.1550s, is what technicians call a bear trap — and it has offered bulls some encouragement, but the options market is not yet convinced.

The options market tells a more cautious story. Implied volatility spiked as EUR/USD key supports and daily lows from mid-late May at 1.1587-77 gave way in the wake of Friday's big NFP data beat. The Benchmark 1-month implied volatility climbed from 5.0 pre-NFP to a peak of 5.85 early Monday, before easing back to 5.5 as the spot price settled higher. However, more tellingly, the 1-month 25-delta risk reversal — which measures the implied volatility premium for EUR puts over calls — rose from 0.25 before NFP to 0.625 on Tuesday, a new high since early April, despite the mild spot recovery.

That measure of perceived downside risk is reinforced by outright demand for EUR put/USD call strikes, too. On Monday there was a pick-up in demand for 1-3-month expiry EUR put options with strikes as low as 1.1200. These would benefit from deeper EUR/USD losses, especially if accompanied by renewed implied volatility gains.

With markets likely to stay sidelined ahead of Wednesday's U.S. CPI, and the June 17 Fed meeting increasingly viewed as the key near-term USD risk event, a clearer directional signal may have to wait. For now, the bear trap may have been sprung — but bulls still have plenty to prove and options are not relaxing their risk premiums for any renewed EUR/USD weakness.
EUR/USD FXO implied volatility


EUR/USD 25 delta risk reversals


(Richard Pace is a Reuters market analyst. The views expressed are his own)