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US Dollar Outlook: USD Implied Trading Ranges for Next Week

US Dollar Outlook: USD Implied Trading Ranges for Next Week

2019-11-08 20:40:00
Rich Dvorak, Junior Analyst
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US DOLLAR OUTLOOK FOR NEXT WEEK: FOMC RATE CUT ODDS IN FOCUS WITH ECONOMIC DATA & TRADE WAR HEADLINES EXPECTED

  • The US Dollar staged an impressive comeback this week which erased nearly half of last month’s downside that pushed the DXY Index to its lowest level since August 09
  • USD price action faces serious event risk next week like CPI and retail sales data releases that will likely weigh on FOMC rate cut expectations in addition to US-China trade rhetoric
  • USD/JPY, USD/CAD, USD/MXN, AUD/USD, NZD/USD and GBP/USD are the major US Dollar currency pairs that appear at risk of experiencing heighted volatility next week

The US Dollar edged higher over the last 5 trading days and has pushed the DXY Index – a popularly referenced basket of major USD currency pairs – to its strongest level since mid-October. Broadly speaking, Friday’s extension to the upside can be explained by falling FOMC rate cut odds and counterpart weakness.

I noted in the previous US Dollar Price Volatility Report that USD price action stood to respond overwhelmingly to the latest US-China trade war headlines and consumer sentiment data. US President Trump’s tariff remarks, which contradicted preceding comments from the White House, ended up dominating markets and overshadowed consumer sentiment.

US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (APRIL 11, 2019 TO NOVEMBER 08, 2019)

US Dollar Index Price Chart Outlook Technical Analysis

Chart created by @RichDvorakFX with TradingView

The US Dollar is currently gravitating around the mid-point retracement of last month’s bearish leg and its 50-day simple moving average, which have potential to keep a lid on further advances. Moreover, there is quite a bit of confluent resistance between the 98.25-98.50 price zone highlighted by September’s consolidation and notable swing highs printed back in August, May and April.

Though positive divergence indicated by the RSI and MACD are encouraging technical signals for USD bulls as the Greenback’s rebound builds momentum. Beyond the 98.50 area, the 61.8% Fibonacci retracement of the US Dollar’s trading range since its October 01 swing high in addition to the 99.00 handle come into focus as potential upside targets. Looking lower, the US Dollar could enjoy technical support provided by its 38.2% Fib near the 97.75 price level.

FOMC RATE CUT EXPECTATIONS (MARCH 2020)

FOMC Rate Cut Expectations Chart

USD price action will likely be driven predominantly by changes in FOMC rate cut expectations, which stand to fluctuate in response to high-impact economic data releases and US-China trade talk progress. From a macro perspective, readings on the US economy continue to show signs of improvement and may facilitate the Fed’s firming monetary policy outlook seemingly communicated at the October Fed meeting. Though still accommodative, FOMC language shifted to a less-dovish tone regarding its approach to making future interest rate decisions.

Correspondingly, the probability of another 25-bps FOMC rate cut at its next meeting has plummeted from roughly 30% to less than 10% over the last week according to the overnight swaps data. At the same time, the probability that the Fed stays on hold into next year continues to climb. There is currently a 69.1% probability that the FOMC will leave its policy interest rate unchanged through its March 2020 meeting, which is up considerably from the 38.1% probability priced in on October 31.

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

US Dollar Trading Ranges Options Implied Table USDJPY USDCAD AUDUSD NZDUSD USDMXN GBPUSD

US Dollar implied volatility looks suppressed overall headed into next week. This seems unusual considering the barrage of economic data and event risk ahead with serious potential to weigh on USD price action. First and foremost, the latest US inflation report will be released with October CPI figures set to cross the wires November 13 at 12:30 GMT. Secondly, retail sales data for October is expected November 15 at 12:30 GMT. NZD/USD is expected to be the most volatile US Dollar currency pair next week with a 1-week options-implied volatility of 8.39%, which compares to its 20-day average reading of 7.34% and ranks in the top 70th percentile of measurements taken over the last 12-months.

The above-average 1-week implied volatility reading for NZD/USD is more than likely due to the fact that the latest RBNZ rate decision and monetary policy statement release are expected next week. Meanwhile, USD/MXN 1-week implied volatility of 7.61% ranks in the bottom 5th percentile of readings despite the latest interest rate decision from Mexico’s central bank on tap. Likewise, AUD/USD implied volatility of 6.17% could be low if Aussie employment data and/or US-China trade war headlines catch traders off-guard, though the 0.6800 and 0.6900 handles will look to keep AUD/USD price action relatively contained.

USD/CAD implied volatility of 4.25% could be underpriced by forex options traders as well if the Loonie selloff accelerates next week following the disappointing Canadian jobs report recently released. Also, GBP/USD will likely fall under forex traders’ crosshairs in light of UK GDP and CPI figures due next week while British MPs campaign ahead of the upcoming snap election aimed at breaking the Brexit gridlock. Options-implied trading ranges are calculated using 1-standard deviation (i.e. 68% statistical probability price action is contained within the implied trading range over the specified time frame).

US DOLLAR SKEW (25-DELTA ATM RISK REVERSAL) (1-WEEK)

US Dollar Risk Reversals Chart

Forex options traders give the impression of a mixed bias on the US Dollar next week judging by 1-week USD risk reversals. USD/JPY, AUD/USD and NZD/USD catch the eye considering that the skew readings for all three of these USD currency pairs fall in their respective top 90th percentiles of measurements taken over the last 12-months.

A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection). For additional insight on market positioning and bullish or bearish biases, traders can turn to the IG Client Sentiment data, which is updated in real-time and covers several currency pairs, commodities, and equity indices.

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

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

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