EUR/USD dips below 1.20, risk reversals hit two-month low

• EUR/USD closed below 1.2 on Tuesday.
• One-month 25 delta risk reversals hit lowest since Feb. 26.

The EUR/USD pair closed below 1.20 for the first time since January. Further, the pair closed below the gradually ascending 200-day moving average (MA), signaling a long-run bear reversal.

So, the strengthening bearish bias in the options market should not come as a surprise. The one-month 25 delta risk reversals are being paid at -0.6 (lowest since Feb. 26) vs 0.1 seen in early March.  The negative number indicates the implied volatility for the EUR puts (bearish bets) is higher than the implied volatility for the EUR calls (bullish bets).

In simple terms, it means the EUR puts are in demand. The risk reversals add credence to the decline in the EUR and indicate the investors are expecting a deeper sell-off in the spot.

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