Options markets showed the euro was on track for its worst weekly loss since July as traders bet the European Central Bank will cut interest rates next week.
One-week risk reversals, a key options gauge of market sentiment and positioning, hit their most pessimistic level in three months on Thursday. The contracts cover the ECB’s Oct. 17 decision.
The euro's recent strength against the dollar has been driven more by expectations of rate cuts from the Federal Reserve than by the European Central Bank. Last week's U.S. jobs report challenged the view that the ECB will lag behind the Fed in rate cuts, weakening the euro's appeal. Traders are awaiting key U.S. inflation data due later Thursday, which could put further pressure on the euro.
Hedge funds have increased their short euro positions in over-the-counter trades this week since the release of U.S. nonfarm payrolls data, according to several foreign exchange traders familiar with the trading.
The euro is currently trading around $1.0950, close to its lowest level since mid-August. Since the end of September, the euro has fallen more than 2% against the dollar, from $1.12 to just above $1.09. Data from the Depository Trust & Clearing Corporation (DTCC) showed that traders are preparing for the currency pair to fall to around $1.08.
In September, the Fed cut interest rates sharply, kicking off an easing cycle that sent the dollar lower and the euro to a near three-month high. However, by October, the trend reversed as market participants began to expect a more modest rate cut from the Fed and a more dovish stance from the ECB.
Money markets now expect the Fed to cut rates by 45 basis points, while the European Central Bank is likely to strike a more dovish tone as it is expected to cut rates by 48 basis points amid weaker economic data and cooling inflation.
That contrasts with August and September, when markets expected the Fed to cut rates by at least an additional 25 basis points.
San Francisco Fed President Mary Daly even said on Wednesday local time that there might only be one rate cut this year.
Currently, the market expects US inflation to slow in September, but if inflation is in line with expectations or stronger, the recent momentum in Europe and the United States may continue. The latest minutes of the Federal Reserve's meeting also showed that some officials prefer to cut interest rates at a more moderate pace.
Article forwarded from: Jinshi Data
