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EURO-DOLLAR: ### POV: FX OPTIONS MARKET PRE-EMPTING SHIFT IN ECB GUIDANCE
-Every EUR/USD risk reversals contract out to three years has retreated sharply
since the Jan24 ECB decision, with RRs out to six months today nursing their 8th
consecutive day of declines, the longest losing streak since March last year.
The contracts show downside hedges becoming relatively more expensive compared
with upside protection. This coincides with inflation expectations in the
Eurozone receding sharply: the 5y5y EUR inflation swap hit 2+ year lows last
week, placing more pressure on the ECB to acknowledge the beginning of a policy
tightening cycle is unlikely to take place "through Summer".
-The retreat in risk reversals coincides with implied vols generally falling
across FX space and particularly in EUR/USD (1m vols printed below 6.0 for the
first time since late 2017 last week). This move has provided some cheap hedging
options relative to recent history: trimming the break-even on a 1m straddle by
30 pips to a roughly 150 pip swing in EUR/USD, a contract that would cover the
key March 7th ECB rate decision as well as speeches from the new ECB Chief
Economist Philip Lane.