(Bloomberg) -- Traders are focused once again on a key support level for the euro that dates back to the the currency's inception more than two decades ago.
Geopolitical risks are supporting haven currencies, sending the euro to its lowest level since June 2020 against the greenback. The common currency remains under pressure ahead of talks between Ukraine and Russia officials and options bets show bearish sentiment for the euro is the strongest since March 2020.
According to options, there is a two-in-three chance that the currency trades at $1.10 within the next three months. The median forecast in a Bloomberg survey sees upside risks for the euro into year-end, while some analysts call a move to $1.09 by end-March.
That would mean a trendline that has been in place since 1999 will be breached, opening further downside risks for the euro-dollar pair. The bearish sentiment may gain further traction should the latest repricing in the fixed income market remain in place. Rates traders are losing conviction that the European Central Bank will increase interest rates twice by year-end, with money markets now pricing 31 basis points of hikes.
Still, strategists at Goldman Sachs Group Inc. recommend fading any delay in ECB tightening wagers given the significant upside shock to near-term inflation. And according to Stephen Gallo, European head of FX strategy at BMO Capital Markets, “the ECB may now seek to play a greater role as a stabilizing force for the EUR if events push EURUSD below 1.10.”
Given that the move in the euro's volatility skew has almost matched that during the pandemic and ahead of the French Presidential elections in 2017, it could be that investors may be reluctant to sell the euro in size, even if $1.10 support goes away.
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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