(Bloomberg) — Options markets are flagging the worst weekly retreat for the euro since July, as traders bet the European Central Bank will cut interest rates next week.
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One-week risk reversals, a key options metric used to gauge market sentiment and positioning, were at the most bearish level for the euro in three months on Thursday. The contracts now cover the ECB’s decision on Oct. 17.
Last week’s US jobs report has challenged the narrative that the ECB will lag the Federal Reserve in cutting interest rates — dimming the appeal of the common currency. Traders are bracing for key US inflation numbers later Thursday that could add to the pressure on the euro.
Since the US payrolls data, hedge funds have rushed to add euro bearish exposure on over-the-counter trades this week, according to FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
The euro currently trades close to $1.0950, near the lowest level since mid-August. Data from the Depository Trust & Clearing Corporation show that traders position for a move weaker toward the $1.08 handle.
Rate Bets
Money markets are pricing 45 basis points of easing by the Fed, compared with 48 basis points from the ECB. That contrasts with August and September, when the FOMC was seen delivering at least an extra quarter point of easing.
In comments on Wednesday, San Francisco Fed President Mary Daly left the door open to just one more rate cut this year.
US inflation is expected to decelerate in September, but if it comes in line with estimates or stronger the latest momentum will likely be preserved. Fed minutes released Wednesday also showed there was a preference among some officials to cut rates at a more gradual pace.
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