On July 22, the key foreign exchange option to watch is the EUR/USD at the 1.1700 level. The euro has been gaining strength against the dollar, leading to a more positive market outlook. This shift might give buyers more power, but without significant news, option expiries could limit gains throughout the session. As the August 1 trade deadline approaches, market attention is returning to the TACO strategy, raising concerns for the dollar amid a recent short squeeze.

Effect of EUR/USD Option Expiry

The large EUR/USD option expiry mentioned by Low could serve as a short-term focal point for the currency pair. It may act like a weight, restricting price movement for the day as market makers adjust their positions around this level. However, traders should look beyond this daily event and focus on the broader trend change Low highlighted. The dollar’s recent rally, which has eliminated many short positions, seems to be losing steam. Recent CFTC data shows that speculative net long positions in the U.S. dollar have dropped for five weeks straight from a peak. This unwinding of crowded trades suggests that the easiest path for the dollar may now be downward.

Returning to the TACO Playbook

We think the market is shifting back to what the author calls the “TACO playbook,” where major economic themes guide market direction. With Eurozone inflation skyrocketing to 9.1% in August, the European Central Bank faces strong pressure to raise rates aggressively. This marks a notable change from just a few months ago, affecting the interest rate outlook compared to the United States. Given this situation, implied volatility in currency markets is likely to increase from recent lows. The Deutsche Bank Currency Volatility Index has already risen over 25% since its June low, and we expect this trend to continue as central banks take different paths. Traders should be careful with option-selling strategies since rising price swings could lead to considerable losses. To align with the bullish outlook mentioned earlier, we suggest buying EUR/USD call options. For example, buying calls with strike prices above the current market for the upcoming weeks offers a defined-risk way to benefit from a continued rally. This strategy allows traders to take advantage of a weaker dollar without the unlimited risk linked to holding a long position directly in the spot market. Create your live VT Markets account and start trading now.

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