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(Bloomberg) — Traders are buying insurance against renewed weakness in the euro as climbing crude oil prices threaten last week’s rebound.
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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.
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A fresh flare-up in the Middle East 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.
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“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.
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Fed Effect
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Expectations for US interest-rate hikes have also had a knock-on effect on the European common currency.
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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.
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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.
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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.
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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.
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