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EUR Put Vol Abates as Russia Risk Recedes, ECB Policy In View

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  • Front-end vols across G10 FX are lower for a second session, with EUR/USD 1m back below 7 points, with demand for EUR/USD downside insurance abating since the beginning of the week. The moves coincide with a re-tightening of policy prospects as evident in European STIRs, with 2022 ECB hike pricing back up to ~37bps from the ~35bp at Tuesday's close.
  • As a result, it appears that the 1m EUR/USD risk reversal contract has bottomed out at the YTD low of 0.5325 points (puts over calls). The contract captures the March 10th ECB rate decision, at which the Governing Council will release their latest projections for both growth and inflation. These forecasts are expected to lay the groundwork for tightening before year-end, with markets pricing the first full 10bps move by August's rate decision.
  • The drop in vols this week has made hedging against further EUR gains relatively cheaper, with a 3m 1.14 call costing ~108 EUR pips vs. the ~120 pip cost seen prior to the Ukraine crisis.
MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com
MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com

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