Volatility suggests short-term EUR support, but medium-term downside scenario still well in place

1month EURUSD risk reversal vol retested its important zero level and now starts to move higher – this suggests that we could see further EUR strength over coming days. Near term resistance at around 1.2440 should limit EUR strength and could offer an attractive opportunity for building an exposure to play EURUSD downside. Nevertheless, EURUSD is expected to continue trading within its 2018 range as the old paradigm of risk off and risk on does not really playout as it used to. Thus, EURUSD seems comfortable in a 1.2200/1.2500 range and it’s tempting to fade rallies.

Furthermore, if today’s tone of the ECB meeting account is consistent with positive messaging heard from the central bank over the past few days, EURUSD could re-visit the top of its range. Despite today’s modest setback, euro bulls should be feeling cautiously optimistic in their view, especially in light of what they’ve heard from the ECB this week. Although there was pushback on Nowotny’s hawkishness, the general tone of communications from the central bank has been positive, downplaying the recent soft patch in economic data. Draghi’s comments yesterday – expressing confidence wages will pick up, and that the economy will keep improving – are music to the ears of EUR bulls (Bloomberg).