EUR/USD Analysis: Puts In Demand, Bearish Bias Intact

The EUR/USD pair fell to a low of 1.1725 on Monday; the lowest level since Oct. 9. The spot currency trades at 1.1760 levels.

The preliminary data for Nov expiry EUR/USD options shows:

EUR/USD EUUX7 Open Interest Change: Current (Oct 23 - Prelim) vs Oct 20

• Open positions in the put options increased by 334 contracts.
• Open positions in the call dropped by 317 contracts.

The additions in the put options and more importantly, the unwinding in the calls clearly indicate that investors continue to buy cheap insurance against the decline in the spot.

EUR/USD EUUX7 Open Interest Change: Current (Oct 23 - Prelim) vs Oct 16

Week-on-week, the open positions in the puts have increased sharply, suggesting the bias is clearly bearish on the EUR. Over the last one week, open positions in the put options rose by 2063 contracts, while the calls have added 704 contracts.

The demand for bearish bets (EUR puts) could be due to-

• Catalan crisis
• Fears that the ECB will announce dovish taper or shall maintain the status quo

In short, the options data adds credence to the bearish technical charts.

Daily chart - Completion of head and shoulders pattern likely

The chart shows-

• Multiple failure to cut through the 50-DMA hurdle (blue line)
• Falling tops formation          
• Head-and-shoulders pattern with neckline around 1.1660

The erratic recovery from yesterday's low of 1.1725 has run out of steam at the downward sloping 1-hour 50-MA today. The rejection at the 1-hour 50-MA, if followed by a break below 1.1725 (yesterday's low), could yield a drop to 1.1660 (neckline) today. The 100-day moving average lined up at 1.1663 is likely to cap losses ahead of the ECB.