 EUR Moves Remain Tricky To Pin Down
The Euro’s response to the Italian referendum has once again highlighted the problematic nature of how EUR responds to various risk-off events. EURUSD reversed the initially sharp sell-off in response to the Italian “No†vote to close the day near three-week highs. The move was a near perfect mirror of the price action that occurred in response to the November 9th US elections move where EUR/USD rallied initially only to reverse and sell off sharply. Indeed, given the way that EUR has responded to various political events, it seems that trying to gauge EUR direction is as difficult as trying to gauge the outcomes of the various political events themselves.
In terms of trying to understand the Euro’s response to the Italian referendum, there are three key factors we can consider.
- Markets were already anticipating a “No†vote and, based on the high levels of implied probability priced in ahead of the event, had already purchased a significant level of protection. This would, therefore, have made it attractive to buy EUR on the initial sell-off to pay for option decay bills. This would have been especially true once it became clear that there was not going to be any immediate implosion in the Italian banking sector which had been one of the key concerns aligned to a “No†vote.
- Some players have judged Renzi’s ability to win 40% of the vote as indicative of a core of support that could be useful and cohesive down the line in terms of progressing Italy’s reform process. This is viewed in contrast to the 60% who voted “No†which are seen as a loose band of ultimately disparate forces.
- The December ECB meeting is seen as a significant EUR risk event with a growing view among some players that the ECB will signal the tapering of its bond purchases in 2017.
Market Struggling For Directional View
Of importance to note this week is the fact that whilst implied volatility is high, the market is not convinced of which direction and the likely move will follow. Indeed, the market is pricing a high probability of a sharp EUR move this week but has no clear view on which direction the move will occur.
