One factor that has supported EUR/USD on dips in recent weeks has been the protection of the base of a double-no-touch strategy with strikes at 1.27 and 1.37. As long as prices stay within those two parameters for the duration of the option play, the buyer of the structure (rumored to be a very powerful Asia central bank) is paid out a multiple of the premium risked. They protect their investments when they feel it is prudent by buying EUR/USD (in this instance) ahead of 1.2700 and selling it ahead of 1.3700 to attempt to keep the range intact and their structure in place.
The seller of the option to the central bank customer has the exact opposite interest; to knock-out the options by pushing the market through one of the strikes. Once EUR/USD trades above or below the strikes (below 1.27 in this example, or above 1.37), the seller of the options gets to pocket the premium and the structure expires worthless.
This Friday at 15:00 GMT, the aforementioned 1.27/1.37 expires. In the run up to the expiry, both sides are intensely interested in protecting their interests. China will buy on dips and banks who sold them the option will sell. This creates volatility if the option is not triggered as options-market makers must scramble to buy back EUR/USD sold to try and force the market lower. Often times prices will just eek through barrier triggers, only to rebound sharply once the prime objective of triggering the barriers is accomplished. Keep this in mind over the next thirty-0dd hours. Just to complicate things, it’s Friday the Thirteenth.
Along the way, the market must absorb jobless claims and retail sales from the US on Thursday and German GDP on Friday. If risk aversion edges higher after poor data 1.2700 has a very large bulls eye on it.
