Traders Poised for More Euro-Dollar Gains in May
- Written by: Gary Howes
Image © European Union - European Parliament, Reproduced Under CC Licensing.
The Euro's rally against the Dollar can extend next month.
Data from the foreign exchange options market shows traders are betting on further gains in the Euro-to-Dollar exchange rate through May.
"A widening spread between one-week and one-month risk reversals signals renewed confidence in euro gains, with one-year risk reversals approaching their strongest close since September 2020," says George Vessey, FX Strategist at Convera.
A rise in the risk reversal for Euro-Dollar (EUR/USD) implies that traders are becoming more biased toward EUR/USD upside — in other words, they are paying more for euro calls than euro puts (or paying less for euro puts relative to calls).
When EUR/USD risk reversals rise, it indicates increased demand for EUR calls (betting on euro strength / dollar weakness).
Above image courtesy of Convera.
Speculators use these products to profit on moves in the currency market, while corporates and institutions use them to hedge against any negative impacts in FX. We reported today that there is significant demand for portfolio investors to buy protection against further Dollar weakness as a significant portion of the market walked into 2025 unhedged.
This means they are bearing a significant FX cost as a result of the counter-consensus fall in the Dollar and rise in the Euro.
The Euro has risen 5.0% against the Dollar in April, adding to March's 4.26% gain, boosted by a significant repraisal in the U.S. economy's growth prospects under a punitive tariff regime.
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Policy uncertainty and President Donald Trump's disruptive reordering of the global political order have prompted international investors to reduce exposure to U.S. assets.
George Saravelos, Global Head of FX Research at Deutsche Bank, warns that a buyers strike of U.S. assets is set to harm the Dollar further.
"There has been a sharp stop of foreign investor inflow into U.S. bond and equity markets over the last two months. Our broad takeaway is that the flow evidence so far points to an, at best, very rapid slowing in US capital inflows and, at worst, continued active disinvestment from US assets. Either interpretation poses a challenge to the USD as a twin deficit currency," he says.
Saravelos thinks what matters for the USD is what foreign investors are doing and, so far, based on his analysis the evidence is that they remain on a buyers' strike on US assets.
