COMMENT-EUR/USD 1.1000 looks unlikely and options concur

EUR/USD has recovered to its highest levels since March 24 at 1.0895, but there are fundamental reasons why it will struggle to break 1.1000 and option pricing concurs.

EUR/USD has been within a 1.0600-1.1000 range since January, with decent support/resistance, including defence of FX options barriers on both sides.

Wednesday's weaker than expected U.S. CPI and retail sales have quashed talk of the potential for the U.S. Federal Reserve to lift rates higher, but re-established expectations for two rate cuts in September and December (FEDWATCH), which is weighing on the USD. However, the ECB is still expected to cut rates in June, with a total of 70bps by December (0#ECBWATCH). Without a repricing of those rate expectations in favour of the euro, EUR/USD will struggle to extend gains toward/through 1.1000.

FX option implied volatility has almost fully retraced the gains seen from its multi year lows in late March/early April. Lower implied volatility levels are consistent with less FX realised volatility and changing rate dynamics.

FX option risk reversals have seen their implied volatility premium for EUR/USD downside versus upside strikes fall to long term lows, with the benchmark 1-month expiry contract now almost neutral on direction. However, there's been no rush to flip those premiums to the topside, or to start protecting any short positions above 1.1000.