Euro Bears Return as Surging Oil Prices Test Currency’s Rebound
Traders are buying insurance against renewed weakness in the euro as climbing crude oil prices threaten last week’s rebound.
The common currency was little changed around $1.1414 in early London trading, but options positioning suggests caution is growing. Risk reversals, a closely-watched gauge of sentiment, show traders are the most bearish in more than a week, while data from the Depository Trust & Clearing Corporation suggest trades favoring the dollar have outweighed bets against the greenback this week.
has pushed oil prices higher, reviving inflation concerns in the euro-area, which relies on imported oil and gas. Demand for the dollar as a safe haven asset during times of geopolitical tension adds to euro weakness.
“Elevated energy prices weigh on European terms-of-trade, and are hence still a downside risk” for the euro versus the dollar, said to Danske Bank A/S analyst August Hyldgaard .
Fed Effect
Expectations for US interest-rate hikes have also had a knock-on effect on the European common currency.
The euro touched a one-year low of $1.1325 last month, pressured by dollar strength after the Federal Reserve’s first meeting under Chair Kevin Warsh . It later rebounded to $1.1473 after Warsh struck a more neutral tone and softer-than-expected US employment data cooled expectations for additional Fed tightening.
Money markets now price about 35 basis points of Fed tightening by year-end, compared with 30 basis points on Friday and 43 basis points after the June Fed meeting.
Traders are already paying more to hedge against wider swings in the euro-dollar pair ahead of next week’s US CPI report. One-week implied volatility has risen since Tuesday by the most since January on a percentage basis.
And with Europe’s data calendar thin, Wednesday’s minutes of the Fed’s first meeting under Warsh “could be a lot more interesting than normal,” with potential repercussions for the euro, according to Camille de Courcel , head of European rates strategy at BNP Paribas SA.
