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US Dollar Price Volatility Report: September Fed Meeting on Deck

US Dollar Price Volatility Report: September Fed Meeting on Deck

2019-09-16 22:23:00
Rich Dvorak, Analyst
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US DOLLAR CURRENCY VOLATILITY SURROUNDS SEPTEMBER FED MEETING

  • US Dollar implied volatility readings remain elevated with forex traders fixated on the upcoming Federal Reserve interest rate decision slated for Wednesday at 18:00 GMT
  • USD price action has fluctuated in a broad range over the last month, but the September Fed meeting stands to provide markets with much needed clarity
  • IG Client Sentiment data reveals the bullish and bearish biases of retail traders covering a wide range of markets and major US Dollar currency pairs

The US Dollar gained considerably to start the week with the DXY Index climbing roughly 0.8% and above the 98.50 price level. US Dollar upside today was largely due to counterpart weakness rather than greenback strength. USD price action will likely continue to be choppy in the days ahead, however, with the long-awaited September Fed meeting quickly approaching.

US DOLLAR DXY INDEX PRICE CHART: DAILY TIME FRAME (MARCH 27, 2019 TO SEPTEMBER 16, 2019)

US Dollar Index Price Chart Technical Analysis Ahead of September Fed Meeting

Chart created by @RichDvorakFX with TradingView

The DXY US Dollar Index rebounded nicely off its 50-DMA which we previously noted as a potential area of technical support that could continue keeping the greenback bolstered going forward. Additional gains in the US Dollar, if materialized, could be stymied around the August 1, September 3 and September 12 intraday swing highs until fundamental clarity from the Fed is provided.

FED INTEREST RATE RANGE PROBABILITIES (SEPTEMBER 2019)

Fed interest rate probability september 2019

A string of positive fundamental developments – driven chiefly by cooling US-China trade war rhetoric and upbeat US economic data prints – have contributed to the drift lower in the probability that the September Fed meeting delivers a 25-bps interest rate cut. In fact, according to CME Group data, the priced likelihood of a second FOMC rate cut this year has fallen to a 65.8% probability from 96.2% at the start of the month. Alas, elevated uncertainty surrounding the upcoming FOMC decision on interest rates as well as the central bank’s economic and monetary policy outlook could cause a sizable move across USD pairs – particularly if the Fed fails to match Draghi and the market’s dovish expectations.

US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (1-WEEK)

US Dollar Implied Volatility September Fed Meeting

High US Dollar implied volatility readings have persisted and will likely remain so with the September Fed meeting quickly approaching. EURUSD implied volatility remains above average and ranks in the top 60th percentile of readings over the last 12-months, but has begun to slip from its multi-month high of 7.56% with the September ECB meeting now in the rearview mirror.

USDCAD is worth watching closely as the week progresses in light of high-impact economic calendar event risk in addition to the impact crude oil prices are having on the Canadian Dollar. Interestingly, the 1-week risk reversal for USDCAD is 0.2500, which falls in the top 70th percentile of recent readings. This suggests that forex option traders, on balance, demand greater upside protection than downside protection regarding spot USDCAD price action over the next week.

US DOLLAR RISK REVERSALS (1-WEEK)

US Dollar Risk Reversal September Fed Meeting

Additionally, AUDUSD implied volatility keeps climbing and may serve as a headwind to sustained upward progression, which we noted in last Friday’s US Dollar price volatility report. Also, USDJPY and USDCHF have 1-week implied volatility measures both fall on the high end of the spectrum and stand to swing materially in response to the upcoming Fed decision. GBPUSD 1-week risk reversal keeps climbing higher as Brexit fears fade. Nevertheless, the direction of major US Dollar currency pairs will likely be overwhelmed by the market’s reaction to the September Fed meeting this coming Wednesday.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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

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