EUR/USD risk reversals: Bearish bias weakens after below-forecast US CPI

• Below-forecast US CPI weighed over the US treasury yields.
• EUR/USD witnessed a corrective rally.
• Risk reversals show drop in implied volatility premium for EUR puts, bottom in place?

The probability of the faster Fed tightening seems to have dropped following the release of the weaker-than-expected US consumer price index (CPI) release yesterday.

The 10-year US Treasury yield fell five basis points to 2.95 percent, helping the EUR/USD put on a good show after Wednesday's doji candle (signaled indecision). So, a bull doji reversal is confirmed, meaning a short-term base has been formed.

Further, the sentiment in the options market has improved somewhat in EUR's favor. For instance, the uptick in the EUR/USD one-month 25 delta risk reversals (from -0.70 to -0.50) represents a drop in the implied volatility premium or demand for the EUR puts (bearish bets), meaning the investors expect the pair to defend the low of 1.1822 in the short-run.

Moreover, a further drop in the risk reversals (rise in implied volatility premium for the EUR puts) would have meant the weak-CPI led-rally in the EUR is a bull trap.

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