(Bloomberg) -- Traders are betting on a weaker euro and greater price swings ahead of the European Central Bank’s policy meeting next week, where a dovish tilt or weaker economic projections risk knocking the currency further.

The euro fell on Wednesday to its lowest in a week versus the dollar, and options markets signal investors are now hedging against further losses. One-week risk reversals, a barometer of positioning and sentiment, show traders have turned the most negative on the euro in more than three weeks. 

Meanwhile, wagers on volatility over the next week surged the most this year, and may spike further tomorrow when the contract captures Thursday’s ECB meet. 

While the central bank is widely expected to keep interest rates unchanged, it will release updated inflation and growth projections. Markets are already betting on faster and deeper cuts this year versus the US, where the economy is holding up much better in comparison. 

“The risk is that the ECB cuts policy interest rates sooner than June, which should limit euro relief rallies,” Brown Brothers Harriman & Co. strategists including Win Thin wrote in a note. They pointed to a gauge of euro-area confidence that unexpectedly deteriorated Wednesday, saying it was “consistent with unimpressive economic activity in the eurozone.”

With the data calendar getting busier from Wednesday’s New York session, options traders are adding exposure to volatility in other contracts as well. Two-week implied volatility in euro-dollar, which captures both the ECB meeting and the release of US February inflation data on March 12, is heading for its biggest two-day increase since November.

Key data releases coming up include euro area inflation and the US PCE deflator, the Federal Reserve’s preferred gauge of inflation. 

The risk of further signs of a resilient US economy are keeping traders bearish on the common currency’s immediate prospects in particular. Demand for options favoring the dollar is more pronounced in short term contracts, before the impact fades after six months.

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