Signs the European Central Bank may be shifting its bias toward rate hikes sent speculative accounts rushing to buy euro upside calls last week. Jean-Claude Trichet, president of the ECB, spoke of the need for "strong vigilance" on inflationary pressures at a press conference last Thursday, which the fx market interpreted as further support for the euro. The comments sent the euro up nearly two points against the U.S. dollar to USD1.2134 on Thursday from USD1.1955. Implied volatility ticked up only slightly, however, to 8.9% Thursday from 8.85% Wednesday.
Traders reported renewed interest in buying euro calls in the lead up to Trichet's comments, with speculative accounts buying short-dated calls at USD1.21 when spot was around USD1.19. The euro/dollar cross was the most popular, as news of terror threats in the U.S. weakened the greenback. The largest flow of the week was thought to come from an investment bank, which traded a yard of six-month euro calls at USD1.30 with knock outs at USD1.15. Traders were uncertain as to the motivation of this trade, but noted it appeared cheap. One official said the trade was executed early in the week when spot was at USD1.19. "Everyone was getting excited about EUR/USD hitting USD1.19 because everyone was all one way," he added. "That prompted the contrarian traders to play the other side."
Ian Stannard, currency strategist at BNP Paribas in London, said the combination of renewed pressure on the greenback and the ECB's change to a more hawkish stance could see the euro could strengthen to USD1.23.
