EUR/USD risk reversals adopt a bearish bias after dovish ECB

The options market has turned bearish on the EUR/USD after the European Central Bank (ECB) reduced QE size by half and simultaneously extended the duration, thus maintaining the same level of stimulus as before.

The dovish taper pushed the EUR/USD down to 1.1624; the lowest level since July 26. On the daily chart, a head and shoulders bearish reversal is seen.

So will the sell-off continue? One-month 25-delta risk reversals gauge turned negative on Thursday, indicating demand for cheap out of the money EUR puts.

Risk reversals chart