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US Dollar Outlook Hinges on Critical Week Ahead

US Dollar Outlook Hinges on Critical Week Ahead

David Rodriguez, Head of Product

Summary: The US Dollar stands at a crossroads as it broke lower, but we generally favor selling USD bounces . Yet the upcoming week may prove critical and could set the tone for USD trading through the foreseeable future.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_us_dollar_forecast_ecb_fomc_body_Picture_1.png, US Dollar Outlook Hinges on Critical Week Ahead

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) recently broke substantively lower against the Euro and other major counterparts, and the coming week will likely decide whether this is the start of a broader USD downtrend. Indeed, a highly-anticipated Federal Open Market Committee meeting could indeed set the tone for Dollar trading through the foreseeable future.

FX options market volatility expectations remain low, however, and it seems that traders are positioned for relatively small moves in the EURUSD. We subsequently favor low-volatility trend trading and range trading strategies from our DailyFX PLUS Trading Signals page. If this is indeed the start of a larger US Dollar downtrend, our “Trend Follower”/Momentum1 and “Tidal Shift”/Momentum2 systems stand to do well across USD pairs.

Studies of real trader performance figures likewise show that low-volatility strategies such as “Congestion Opportunities”/Range2 and benchmark Relative Strength Index trading systems can do well in current market conditions.

It will be critical to watch US Dollar price action in the week ahead; whether or not the Greenback breaks lower could determine our trading strategy biases through the coming months of trading.

Market Conditions:

FX Options volatility expectations remain surprisingly low despite critical event risk for the Euro and US Dollar in the week ahead. Any significant surprises in key events could catch traders off-guard and produce especially large moves across major FX pairs.

forex_us_dollar_forecast_ecb_fomc_body_Picture_2.png, US Dollar Outlook Hinges on Critical Week Ahead

The Euro/US Dollar recently surged as the US S&P 500 traded towards fresh multi-year highs. And though the short-term correlation between the EURUSD and S&P trades near lows, we believe that any substantive moves in stock markets could force similar reactions out of the Euro and US Dollar.

forex_us_dollar_forecast_ecb_fomc_body_Picture_3.png, US Dollar Outlook Hinges on Critical Week Ahead

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

Contact David and follow via Facebook and Twitter:

http://www.facebook.com/DRodriguezFX

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Join David’s e-mail distribution list by sending a message with subject line “Distribution list” to drodriguez@dailyfx.com

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. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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