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The euro’s recent strength against the U.S. dollar showed signs of waning, as indicated by the FX options market, ING analysts said today.
According to their projections, the EUR/USD pair is expected to trade within a range of 1.0810 to 1.0880 today. Moreover, US consumer confidence data, which is softer than expected, could pose an upside risk to the euro against the dollar.
The one-month EUR/USD risk reversal, which reflects the market’s direction bias, has shifted from favoring euro calls to now indicating a preference for euro puts. This metric dropped from a bullish skew of +0.45% last week, the most optimistic since 2021, to a bearish tilt of -0.14%.
The change in sentiment may be partly due to the potential impact of upcoming reciprocal trade tariffs between Europe and the US, expected to be introduced in early April. This development has strained relations between European and US leaders, with Europe potentially facing significant repercussions.
In Germany, political developments are also influencing the currency market. Friedrich Merz, the leader of the CDU, is working to gain the support of the Greens for a constitutional debt-brake reform and a massive EUR500bn infrastructure package.
The outcome of these negotiations, particularly ahead of a crucial vote next Tuesday, is expected to create volatility for the EUR/USD pair. Any indication that the Greens might oppose the bill could negatively affect the euro’s value.
Additionally, the market is awaiting Fitch rating agency’s review of France’s credit rating after the market close today. Although Fitch moved France to a negative outlook in October, analysts believe it may be premature for the agency to downgrade the country’s AA- rating.
Meanwhile, the resilience of eurozone government bond spreads against German Bunds, despite looming defense spending plans, has come as a surprise to some observers.
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