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ECB, CPI Risk Underpins Surge in Vols to Multi-Month Highs

  • Front-end EUR vols are bid early Wednesday, with overnight implied vols now capturing both the US CPI release today as well as the ECB rate decision and press conference on Thursday. Overnight vols above 13 points compare with average background vol of just over 5 points so far in 2024, suggesting a decent risk premium for the pair into Thursday's NY cut.
  • We identify the hawkish risks as the press conference explicitly downplaying any commitment to a June rate cut, potentially via Lagarde stressing that a move is highly conditional and not guaranteed. Conversely, a downgrade in communications from “sufficiently long duration” and/or “sufficiently restrictive” with respect to policy rates could prove dovish for market prices.
  • An ATM straddle struck for tomorrow's NY cut implies a break-even of ~60 pips for EUR/USD, meaning a hawkish meeting could bring resistance at 1.0943 into play, while a reversion low would open the Apr 05 low at 1.0791.
  • Hedging flow for EURUSD since the beginning of the week has generally favoured upside protection, mirroring the ~80 pip recovery off NFP-inspired lows, with notable demand for 1.0900 and 1.0905 call strikes over the past three days.

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