Euro at 2-week high in event-filled week, FX option bets
The euro settled at a two-week high on Tuesday, moving in tiny ranges, as large derivatives market positions discouraged traders from taking large bets in an event-filled week.
Trade tensions between the United States and China escalated overnight after U.S. officials announced criminal charges against China’s Huawei Technologies, escalating a fight with the world’s biggest telecommunications equipment maker, which denies wrongdoing.
The announcement came before trade talks with Beijing later this week and snuffed out a fledgling relief rally in global risk assets led by Chinese stocks and the euro currency.
Keeping the euro in a tight range are large positions worth $6 billion between $1.14-1.15 expiring later this week, according to Refinitiv data. Traders say any breach of those ranges would fuel volatility in the currency markets.
“Markets are quiet,” said Adam Cole, chief currency strategist at RBC Capital Markets noting Brexit headlines will be the big driver in foreign exchange markets.
Market participants are also focused on the U.S. Federal Reserve’s policy meeting on Jan. 29-30, at which Chairman Jerome Powell is expected to acknowledge growing risks to the U.S. economy as global momentum weakens.
Investors expect the Fed to adopt a more cautious stance on policy than it did in 2018, pressured by signs of a peak in U.S. corporate earnings and the threat of a slowdown both at home and globally.
While the dollar entered 2019 as a consensus short bet among investors, a slowdown in China and increasing caution from major global central banks such as the European Central Bank has prompted some investors to take bearish bets off.
Indeed, Morgan Stanley’s latest positioning data shows investors have become more bullish on the dollar in recent days while broad bets on the British pound have become neutral.
Sterling edged lower before crucial parliamentary votes later in the day that are aimed at breaking the Brexit deadlock.
The pound has rallied 6 percent from Jan. 4 lows, but further gains may be limited unless lawmakers emerge with a big majority on the votes.
On Tuesday, sterling rose 0.12 percent at $1.3178 but remained near a 2 1/2-month high of $1.3218.