Euro Heads for Third Day of Gains on Fed Talk Before ECB Meeting

• Euro Heads for Third Day of Gains on Fed Talk Before ECB Meeting

The euro traded stronger for a third day on the back of dovish rhetoric from Federal Reserve policy makers and bullish options trades before the European Central Bank’s meeting on Thursday.

The latest comments by Fed officials lowered the odds of another rate hike by the end of the year and provided no leeway to dollar bulls. The U.S. currency dropped a fifth day, as measured by the Bloomberg Dollar Spot Index, also due to concerns over the looming debt ceiling. A lack of dollar-supportive developments has seen real money names adding shorts this week, according to traders in Europe and London.

Investors also added upside euro exposure in options. As the market remained short-gamma above $1.20, risk reversals extended their recent gains, fully negating a bearish shift seen after reports that ECB President Mario Draghi might try to jawbone the currency lower at the meeting. Short-term bullish bets in the common currency hit their strongest level in a month.

One-day implied volatility in euro-dollar rose on Wednesday to incorporate ECB-decision risk, sending hedging costs to their most expensive in three months. Option pricing suggests that the common currency’s $1.1823-$1.2070 range since Aug. 29 will hold after Draghi’s press conference: break-even stands at around 100 dollar pips.

• The euro stood 0.3% higher at 1.1944 as of 11:17 a.m. London, while BBDXY slipped by 0.1% following a 0.3% drop on Tuesday
• The Canadian dollar was little changed at 1.2384 versus the greenback before a decision by the Bank of Canada
  • While only six out of 29 analysts surveyed by Bloomberg see a rate increase, market pricing has it as more of a coin toss; as latest robust growth contrasts with inflation data that lies at the lower band of the BOC’s desired range, all options remain open
  • Leveraged and interbank accounts stand ready to fade any dip in the loonie should rates remain unchanged, as Governor Poloz is most likely to keep commentary hawkish and point to an October hike, said the traders, who asked not to be identified as they weren’t authorized to speak publicly
  • USD/CAD offers good through the announcement at 1.2500-50, while take-profit bids seen above 1.2200 and 1.2100
• Antipodeans led losses in G-10 bloc, giving back some of their Tuesday gains
• The yen rose to 108.45 high after a social media report about the size of an earthquake in North Korea, as such previous reports have indicated a nuclear bomb test; pair recovered sharply to 108.71 as the report seems to be erroneous
• The pound hit a four-week high at 1.3048, on the back of a weak dollar, rather than on conviction of a sustainable move higher
  • Take-profit interest capped the upside with more now seen at 1.3060-70