EUR/USD's options market shows strongest bull bias in five months.
Investors expect the single currency to extend its recent rally.
Sino-US tensions and political deadlock in the US could play spoilsport.
The EUR/USD options market data shows investors are anticipating continued rally in the single currency.
Risk reversals, a gauge of calls to puts on the common currency, traded at 0.675 with a bias to EURcalls (bullish bets) on Wednesday compared to 0.50 on Tuesday, according to data source Reuters. Wednesday's reading is the highest since March. In other words, the EUR call bias (or bullish view) is now strongest in five months.
A positive risk reversal is the result of call options drawing higher premium than put options. A call option gives the holder the right to buy the underlying asset at a predetermined price on or before a specific date. Meanwhile, a put option represents the right to sell.
With risk reversals hitting five-month highs, it seems safe to say that investors are adding bets to position for a stronger euro rally. The pair is currently trading at 1.1873, representing an 11.6% gain on the low of 1.0636 observed in March, having recently clocked a 26-month high of 1.1909.
A further rally, however, may remain elusive if Sino-US tensions weigh over the risk assets. In that case, the oversold dollar will likely pick up a haven bid. The Trump administration said on Wednesday that the Chinese-owned short-video app TikTok and the WeChat messenger are significant security threats and added that it is planning to step up efforts to purge untrusted Chinese apps from the US digital networks.
Another factor that could put equities under pressure and lift the US dollar is the political deadlock in Washington, where the lawmakers are still struggling to hash out an additional stimulus package.
On the data front, the focus will be on the German Factory Orders for June, scheduled for release at 06:00 GMT, and weekly US jobless claims due at 12:30 GMT.
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