Currency Futures and Options Point Toward US Dollar Reversal

10/08/2010 12:00 am EST

Focus: FOREX

FX options and the futures market continue to show US dollar sentiment at bearish extremes, and the risk of material reversal is quite high. Yet nascent signs of dollar recovery have almost immediately been met with subsequent declines, and the timing of any such US dollar reversal eludes us. Our DailyFX volatility indices have hit the top of their quarterly ranges as FX options markets price in substantial moves in the days and weeks ahead. Suffice it to say, traders should watch for major US dollar volatility through near-term trading.

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Currency futures and options sentiment has remained at bullish extremes for quite some time now, and yet the EUR/USD shows relatively few signs of slowing its ascent. The overnight decline on Thursday offers an early sign of potential reversal. However, we said the same thing following Monday’s sharp declines, and the pair has since erased most of those losses. The key question becomes when—not if—we can definitively say that the EUR/USD has set an important top. Sentiment and positioning certainly suggest markets are ripe for correction, but the timing of such reversal has eluded us.

By David Rodriguez of

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