(Bloomberg) — The euro’s best three-day rally since 2015 is encouraging traders to bet the currency will rise 10% further in coming months.
Most Read from Bloomberg
Hedge funds are buying options betting that the currency could reach as high as $1.20 in six to nine months, according to FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly. That level was last seen in 2021.
Options sentiment, as depicted by so-called risk reversals, turned most bullish on the euro in five years, while data from the Depository Trust & Clearing Corp. show that two out of three options this week targeted a stronger euro.
The common currency rose 1.5% to $1.0789 Wednesday, the highest in four months, and had its biggest three-day gain since August 2015 after Germany announced plans to unleash hundreds of billions of euros for defense and infrastructure spending.
“To me the initial move is to $1.12,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. “But if I’m right, this thing could have more legs, meaning that you start getting up into the $1.20 area.”
The anticipated historic increase in German borrowing, along with growing concerns about the negative impact of aggressive tariffs on the US economy, are supporting the euro, prompting a rush by investors for topside exposure.
The euro has jumped above the closely watched 200-day moving average. A close above that level would signal further gains to traders who watch technical measures, opening the door for a test of last year’s highs around $1.12.
That’s a sharp contrast to prevailing expectations earlier this year that the euro was headed for parity against the greenback.
“The euro-dollar market dynamics are undergoing significant shifts,” said Julian Weiss, head of global G-10 vanilla FX options trading at Bank of America, noting that demand for euro call options has surged. “This development may signal the onset of a new trend, potentially reversing the multi-year US dollar rally.”
Some analysts, however, are questioning whether the rally is sustainable.
“The dollar depreciation momentum could have further to run and while we abandoned our call for EUR/USD to drop below parity, we maintain our view that renewed US dollar strength is still likely,” said Derek Halpenny, head of FX research at MUFG.
