The currency market took a break during the overnight hours, following the strong moves seen lately. Price action during the Asian and the European sessions was relatively flat, with the major pairs retracing a small portion of the ground lost in recent trading. So far into the session, these moves can be seen only as a standard retracement off oversold levels, rather than a change in trend.Most assets quoted in the financial market are trading in an oversold state due to the recent price action, with the Usd, Gold and Treasuries at the overbought line. These three are bought because they are seen as having very small risks. The U.S. dollar has the advantage of its status as a reserve currency at times of risk aversion, since 61.5% of the global currency reserve is held in the Usd.
The market had been characterized by a strong risk-aversion phase over the last few trading sessions, caused by a possible default in the Euro-zone. If Greece, or any other country, defaults on its debt obligations the global economy could experience a crisis similar to the one seen in 2008 and 2009.
Among the major currencies, the Eur took the biggest hit since it is right in the middle of the problems. The Eur/Usd plunged to one-year low, breaking below the 1.3000 psychological barrier in trade on Tuesday. Looking forward, the outlook of the pair lies to the downside, with a possible target in the 1.2500 area.
Interestingly, the Eur/Usd implied volatility turned to a downward slope, known as volatility skew, rather than the usual volatility smile that characterize the foreign exchange options market. This shows that options traders expect strong moves to the downside, with only limited upside action. For the currency options market, volatility skews are very rare.
The Usd will find even more buyers unless the situation in Europe improves quickly, which is unlikely, but some relief for the Eur and for the other major currencies might come at Thursday’s ECB Press Conference.
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