Leveraged funds remain bearish the euro, sharply increasing shorts this month. Asset managers marginally trimmed their long positioning, although these euro longs are by far the largest exposure across all currencies.
EUR/USD has traded between 1.0450 and 1.1150 since September 1, currently sitting near the middle of this six-month range. CME Group data on option strikes suggests markets are weighted to EUR/USD downside over upside.
The FX volatility curve using CME Group options data suggests investors are the calmest since mid-2021.
EUR/USD (6E) has fallen just over 3% since topping out near 1.1150 in late December, with the pair currently trading around the middle of its six-month range. A hawkish repricing of Federal Reserve (Fed) expectations has driven this USD outperformance, with the dollar rallying broadly against many G10 counterparts.
Leveraged funds have materially increased EUR exposure. They have increased short positions by 32.4k contracts (over tenfold) since early January, leading to a net-short position of 35.6k contracts (Chart 1).
Meanwhile, asset managers have become slightly less bullish, trimming long exposures by 43k contracts to 356.8k long. This positioning is by far the largest across all currencies (Chart 2).
Macro Hive take: EUR/USD is under pressure. Investors and momentum models are selling the currency at 1.08 and below, growth differentials are widening in favor of USD and hawkish data releases are weighing on the UST front-end. We remain biased for EUR/USD to trade lower.
Option strikes
Investors see EUR/USD downside as more likely than upside. According to CME Group data on option strikes:
- There is net demand for EUR/USD calls from 1.09 to 1.11, with more at 1.14 (Chart 3). However, net demand quickly weakens thereafter.
- In contrast, there are bigger clusters of downside demand between 1.05 and 1.08, with the standout bearish position at 1.03. That is a 4% decline from current levels.
What to watch: Data dependence is the watch phrase for both the Fed and European Central Bank (ECB). Several key data points are due on both sides of the Atlantic before the next Fed rate decision on March 20 and the next ECB rate decision on March 7. These include U.S. PCE on February 29 and the U.S. jobs report on March 8. Both central banks are expected to keep rates steady next month.
FX investor risk appetite
CME Group has a range of FX volatility data to help investors track the level of volatility. We can also use FX volatility data to determine investor risk appetite. We find the shape of the FX volatility curve useful in this regard. When shorter-dated FX implied volatility is higher than longer-dated volatility, this suggests investors are worried or in panic mode. In contrast, when shorter-dated FX volatility is lower than longer-dated volatility, this suggests investors expect calm markets. The latest data finds:
The FX volatility curve has flattened through 2024 to levels not seen since mid-2021 (Chart 4). This suggests investors are calmer, likely because economic growth has stabilized and conviction remains that easier central bank policy is coming this year.
The move aligns with CME Group’s CVOL volatility indices, which have followed a similar dynamic to trade near year lows.
Outside FX, equity volatility remains historically low, while rates volatility remains historically high.
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