US Dollar's Next Move is Critical - Watch GBP and JPY for Cues
- Relative trader indecision keeps us focused on the Dollar’s next moves
The US Dollar defied expectations and surged to fresh decade-plus highs versus the Euro. Its next move seems especially critical—time to watch the GBP near $1.50 and JPY at ¥121.80.
Forex volatility prices suggest traders expect that exchange rate moves will slow in the week ahead, and indeed the chart below shows that expectations continue to trend lower after peaking in January. Relative indecision clouds market outlook and keeps us focused on the Greenback’s next moves.
Forex Volatility Prices Show Clear Trader Indecision, Cloud Currency Forecasts
Data source: Bloomberg, DailyFX Calculations
In the absence of a larger breakout our options seem relatively limited. It seems ill-advised to go against the overwhelming trend and sell into US Dollar gains. Yet until we see a meaningful breakout versus the Japanese Yen and British Pound, we believe the Dollar remains at risk of a short-term correction. To that end we favor positioning for a GBP breakdown and will keep a close eye on key Yen crosses for the next trade opportunity.
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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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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.
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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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