The euro has staged an impressive recovery over the past few weeks, driven upward by the cautiously optimistic belief that policymakers are finally preparing to row the rescue boat in a coordinated way.
In early August, Mario Draghi suggested that the European Central Bank was preparing to begin purchasing sovereign bonds in the peripheral markets. Two weeks later, Germany's Chancellor Merkel indicated that her government was in full support of this policy shift.
Since then, investors have waited for the ECB to dip its oars in the water -- and many expect to see Mr. Draghi announce his purchase plan at the Bank's September 6th meeting.
However, it is important to remember that this particular rescue vessel remains firmly tethered to the dock.
On September 12th, Germany's Constitutional Court is due to hand down its verdict on the legal validity of the previously-agreed-to European Stability Mechanism. If this ruling is negative, there is a risk that a more ambitious ECB programme would also be considered illegal under German law.
Of course, this is quite unlikely, given the pains that policymakers have taken to structure the permanent bailout fund, but the uncertainty is quite likely to keep the Bank on hold for a few more weeks.
This implies that few of the large speculative players are likely to heavily short the euro, but also sets the stage for two major volatility catalysts -- potentially on the 6th as well as the 12th.
For hedgers looking for attractive execution points, the coming weeks should provide plenty of opportunities. The key is to prepare for them.
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