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Bloomberg
The euro dropped toward $1.1800 as investors continued to unwind long positions, with fresh tactical selling pressure setting in ahead of a speech by the Federal Reserve Chair Janet Yellen later on Tuesday.
What started off as a knee-jerk reaction after the German election now appears to have become a broader hit on euro bulls’ conviction. Concern that European Central Bank may not shed sufficient light on stimulus tapering even at its next meeting is weighing on the sentiment, amid growing speculation that the $.120 level marks the limit of the central bank’s tolerance for gains in the common currency for now.
Investors with medium-term euro exposure saw value in trimming their longs given the Fed’s latest hawkish tilt, talk of US tax reforms and the odds that the ECB will keep the bar low at its October 26 meeting. The euro’s inability to stage a significant rally during the most recent war of words between US and North Korea raised doubts whether it can re-test $1.20 level soon enough. Technical models joined the selling side as euro-dollar breached support after support and slipped to a low of $1.1810, a level unseen since Aug. 25. Stops on euro longs were triggered across the board, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.
Still, the divergence in price action between the spot market and options suggests that headwinds faced by the euro may prove short-lived, even if it extends declines in the short term. Risk reversals on all tenors up to one year may have taken a hit this week, yet they still trade above par.