COMMENT-As Fed cut hopes dwindle, EUR/USD rallies are opportunities for bears

EUR/USD traded higher Wednesday on the back of improved risk sentiment but a shrinking probability for Fed rate cuts and options indications suggest bears will be looking to sell rallies.

After Fed Chair Powell said Tuesday that restrictive monetary policy needs more time to work investors lowered the amount of easing expected. Short-term rates markets now price in only 42bps of cuts for 2024 while CME's FedWatch tool lowered the probability for a September cut to 68% from just above 70% just a day earlier https://tinyurl.com/bdf74mew.

German-U.S. spreads (US2DE2=RR) tightened slightly Wednesday but remain near recent wides as the dollar is expected to maintain its yield advantage over the euro.

Options investors are hedging for downside risks and the possibility for a test of parity.

Risk reversals sharply increased vol premiums for EUR/USD puts over calls while implied volatility recently hit its highest since early February.

Technicals suggest downside risks remain. Daily RSI turned up from oversold territory but monthly RSI is falling and a monthly inverted hammer has formed for April.

EUR/USD may also be consolidating the fall from the April 9 high, which reinforces bearish signals.

Rally sellers are likely to target 1.0450/1.0500. A break of that support may lead them to target 1.0000.

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