Euro opened the week remaining within a tight range, between 1.11899 and 1.11708. The markets are looking for more information as to the timing of the much talked about QE tapering. The Euro area economy boosted by economic growth in Germany seems on track to see higher inflation at levels close to the ECB target or higher.
Draghi has said that the ECB needs further proof of the durability of inflation before they change their stance on asset buying. Trump in the US in the meantime has failed to put through any of his economic agenda, especially the tax reform. The administration has been delayed by various accusations from the opposition party of contacts between the Trump campaign and Russia, while they are also trying to pass a new healthcare bill capable of garnering a majority in congress.
The Fed has signalled that a rate hike is most likely at the next meeting in June, with most analysts seeing the probability of higher rates at 80%. We will likely get more information as to the possibility of a hike at the next meeting as we will get Non-Farm Payrolls this Friday at 01:30pm. Expectations are for an increase in jobs of 183k, compared to last month’s rise of 211k.
If you think that the Euro will rise after data release then all you need to do is buy a Call option, which gives you the right to buy EURUSD at a set price (strike), For a specific date (expiry) and amount of your choice.
The main advantages of using an option compared to opening a Spot position comes in the reduction and mitigation of risk. Buying an option may be cheaper than the cost of your stop loss if it is reached. Bear in mind that after big figures like NFP the market may experience extreme increases in volatility therefore stop losses must be very wide and can be expensive. Stop losses may not always be closed at the price you placed as a stop. In a Fast market, typical after a surprise in important data releases, the price you are stopped at may differ considerably. With options that simply cannot happen, the cost of the option is your total risk when buying.
The screenshot below shows that a EURUSD Call option with a 1.11719 strike, 7-day expiry and for €10,000 would cost $51.42, which would also be the maximum risk.
This screenshot shows the profit and loss profile of the above option, just click the Scenarios button.
On the other hand, if you feel that the Euro may fall again against the dollar then all you need to do is buy a Put option, which gives you the right to sell EURUSD at a set strike, expiry and amount.
The screenshot below shows that a EURUSD Put option with a 1.11711 strike, 7-day expiry and for €10,000 would cost $47.90, which would also be the maximum risk.
This screenshot shows the profit and loss profile of the above option.