- Forex event risk picks up ahead of key US Nonfarm Payrolls report and European Central Bank
- Short-dated FX volatility prices pick up while broader measures point to slower price moves
- Breakout risk relatively high in coming days but has fallen overall, strategy remains unchanged
Markets stand at a crossroads ahead of a key European Central Bank meeting and US Nonfarm Payrolls results. Why might the Euro bounce and US Dollar shed gains?
Put simply, volatility prices continue to fall as traders predict the USD and other currencies will stick to relatively tight ranges through the foreseeable future. A key exception is 1-week volatility; the upcoming European Central Bank decision threatens large EUR moves, while US Nonfarm Payrolls data has historically been one of the top market-movers in FX and broader financial markets.
The US Dollar trades near key highs versus the Euro and Japanese Yen, but the overall downtrend in volatility prices suggests few expect a more sustained Greenback move. And indeed we may need to see a relatively major shift on key economic event risk to change our view in the week ahead.
Forex Volatility Prices Pick up on Key Week Ahead, Nonetheless Remain in Downtrend
Data source: Bloomberg, DailyFX Calculations
Thus our outlook remains mostly unchanged—until volatility turns the Euro, Japanese Yen, and other currencies are likely to stick to tight ranges versus the US Dollar and themselves. We will continue to focus on low-volatility range trading strategies until further notice. Sign up for any future updates on market conditions via our e-mail distribution list.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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Definitions
Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.
Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.
Range High – 90-day closing high.
Range Low – 90-day closing low.
Last – Current market price.
Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.
OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
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