EUR/USD Risk Reversals Signals Further Losses

[DailyFx]

Broad dollar strength has driven the EUR/USD lower.



Eurozone Consumer price figures were right in line with expectations, providing no real support for the currency. Instead, a multitude of factors have contributed to the dollar’s recovery (outlined in the US dollar section above), but the bottom line is that US dollar weakness was overdone. Risk reversals in the EUR/USD hit an extreme level. The 25 delta 3 month risk reversals are at the highest level since June 2007. Whenever risk reversals hits critical levels, it indicates that anyone who wants to be long Euros are already long and as a result, sentiment has hit an extreme. The last time EUR/USD risk reversals were near these levels was in June and September 2007. Both times, we saw a relief rally in the US dollar that lasted for approximately 250 to 300 pips. Risk reversals are once again telling us that the US dollar is oversold and due for a further recovery. However as we saw in previous months, a rebound in the EUR/USD is not the same as a long term bottom (risk reversal chart). Meanwhile Swiss retail sales doubled expectations as spending on electronics and leisure products increased. The Swiss National Bank is comfortably on hold as they expect inflation to ease back to their 2 percent target next year.