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US Dollar Outlook: USD Price Volatility & Implied Trading Ranges

US Dollar Outlook: USD Price Volatility & Implied Trading Ranges

Rich Dvorak, Analyst

US DOLLAR CURRENCY VOLATILITY & USD PRICE OUTLOOK FOR THE WEEK AHEAD

  • USD price action stands to be bogged down by daunting fundamental headwinds like rising FOMC rate cut odds, a ballooning Fed balance sheet and fading forex volatility
  • US Dollar downside could continue if risk appetite keeps running rampant driven by US-China trade deal hopes and a lack of scheduled event risk on the economic calendar for next week
  • GBP/USD is expected to be the most volatile major US Dollar currency pair with a 1-week implied volatility of 6.57%

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Expected currency volatility continues to show signs of receding from recent levels with 1-week implied volatility measures across major forex pairs sliding from readings taken in last week’s US Dollar Price Volatility Report. This is also reflected by the relatively lower 1-week implied volatility readings for the selected USD pairs when compared to their respective average readings over the last 20 trading days and 12-month distributions. 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 IMPLIED VOLATILITY & TRADING RANGES (1-WEEK)

US Dollar Implied Volatility Trading Ranges EURUSD GBPUSD USDJPY USDCHF USDCAD AUDUSD NZDUSD USDSEK USDMXN USDCNH

That said, GBP/USD is expected to be the most volatile G7 currency pair while USD/SEK is expected to be the most volatile G10 currency pair with 1-week implied volatility readings of 6.57% and 7.15% respectively. USD/CAD 1-week implied volatility is interestingly low considering recent Canadian jobs data and upcoming speeches from BOC Governor Poloz, which puts the loonie at risk relative to its US Dollar counterpart. AUD/USD 1-week implied volatility also seems peculiarly depressed considering a dismal Australian employment and Chinese economic data, which may motivate another RBA rate cut.

CHART OF US DOLLAR INDEX REALIZED VS IMPLIED VOLATILITY

Chart of US Dollar Index Price Volatility

Check out this insight on the Top 10 Most Volatile Currency Pairs and how to trade them

A lack of currency volatility, while generally positive for risk appetite, could weigh negatively on broader USD price action. This concept can be largely attributed to the US Dollar’s posturing as a safe haven currency. When implied volatility and realized volatility are on the rise it typically indicates an increase in perceived risk or uncertainty (and vise-versa). With risk appetite plentiful, however, US Dollar selling pressure might soon resume due to waning haven demand.

FED BALANCE SHEET ON PACE TO TOP $4.2 TRILLION BY YEAR-END

Fed Balance Sheet Chart

Another headwind faced by the US Dollar is the near-vertical explosion in the size of the Federal Reserve’s balance sheet. The FOMC has increased the total assets held by the central bank by a whopping $288 billion since the beginning of September. In short, this increases the supply of dollars circulating in the financial system and has serious potential to keep exerting downward pressure on USD price action.

FOMC INTEREST RATE CUT PROBABILITIES BACK ON THE RISE

Chart of FOMC Interest Rate Cut Expectations

The latest overnight swaps pricing for the Federal Reserve’s monetary policy update scheduled for its September 2020 meeting seems to be repricing FOMC rate cuts. Aside from US-China trade talk uncertainty starting to resurface as the two sides struggle to finalize a phase one trade agreement, US economic data is showing signs of deteriorating further. Most recently, US retail sales data disappointed traders and could partly explain the recent rebound in Fed rate cut expectations. The probability that the FOMC will deliver another interest rate cut by its September 2020 meeting has climbed from a low of 52.2% earlier this week to the most recent reading of 65.0%.

-- 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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