Synopsis:
SocGen observes that the EUR/USD options market is showing signs of exhaustion following the euro’s sharp early-March rally. Implied volatility and risk reversals suggest that bullish positioning may have peaked for now, and a period of consolidation is likely before any renewed EUR upside.
Key Points:
1️⃣ Risk Reversals Flattened:
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The 3-month EUR/USD risk reversal (RR)—a gauge of demand for euro calls vs. puts—rose from -1 to 0 in short order as spot tested the 1.0940 level.
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A 0 RR level indicates a neutral skew, implying that call and put demand are balanced—a signal that the recent bullish positioning may have reached saturation.
2️⃣ Historical Parallels:
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The last time RR flattened like this was in August, right before EUR/USD peaked at 1.12 and pulled back to sub-1.10 levels.
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This precedent suggests the options market may be a leading indicator of tactical reversals or pauses in EUR/USD trends.
3️⃣ Positioning Cleanup Needed:
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The swift and sizable build-up in euro bullishness via options has likely created crowded positioning.
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SocGen believes this implies a need to “clean” positioning—i.e., see a consolidation or mild retracement—before the next leg higher in EUR/USD can be sustained.
Conclusion:
The EUR/USD options market is signaling tactical fatigue, with risk reversals at neutral and signs of maxed-out bullishness. SocGen suggests a pause or pullback is likely in the near term, offering an opportunity to reset positioning before a potential continuation higher.
