Expensive EUR Puts, Dovish ECB Gives Us A Lower Euro

by: Dean Popplewell

By Dean Popplewell

Telegraphed, orderly and one direction - investors will take it. In fact they will take anything with a pulse that is capable of breaking the confines of range trading.

The 17-member single currency for too long has been floundering, waiting for investors to be either fundamentally or technically vindicated. The market seeks extended momentum one way or another to allow them to get more involved - a basic ingredient that has been missing in the forex space this quarter.

The surprised upbeat assessment delivered by the Fed mid-week on the US economy has weighed on the "non-taper" psyche of investors, very much hurting dollar bears. The Fed commencing a December taper is not ruled out just yet - it may however be after next week's NFP report.

Is the EUR oversold? The market had been expecting to get a clearer picture from US policy makers. This week's dollar gains were supposed to be seen as consolidative in nature and mostly on the back of month-end requirement. However, a three "big fig move" goes beyond that.

Is this deep EUR loss is there a signal that this is more than a corrective move in the dollar? Investors are required to sit through more "dirty" data over the coming weeks. It's true, the EUR does face strong resistance at 1.3835 areas - peaking at its two-year high last week and has since fallen to trade below 1.3500 as we close out the week. The problem for the EUR is that there is ample room for it to fall much further as the heavy dose of "pro-Euro positions" built up this year are beginning to unwind.

In the options market, the rising prices for EUR "puts" suggest that the single currency downfall could gather further momentum. Coupled with a less than dovish Fed and an ECB only getting more dovish against the recent spate of disappointing data suggests that the EUR could be persuaded to peak below 1.3350 sometime soon.

Remember to circle November 7th - The ECB has room to cut rates -25bps to +0.25%.