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US Dollar Price Volatility Report: Trade Wars, Powell & Inflation Eyed

US Dollar Price Volatility Report: Trade Wars, Powell & Inflation Eyed

Rich Dvorak, Analyst

US DOLLAR CURRENCY VOLATILITY & IMPLIED TRADING RANGES FOR NEXT WEEK:

  • The US Dollar is off to a weak start to the fourth quarter, but the greenback will look to rebound off key technical support levels going forward
  • USD price action is expected to remain fixated around the dominant themes of trade wars, recession risk and monetary policy uncertainty that will be front and center next week
  • Download our free US Dollar Forecast for 4Q-2019 for comprehensive fundamental and technical insight

The US Dollar slid roughly 0.3% over the last 5 trading days measured via the DXY US Dollar Index. I noted in my previous US Dollar price volatility report that USD price action soured early on in the week as markets reaccelerated Fed rate cut bets following particularly disappointing PMI datapoints. To cap off the week, a mixed NFP report sent the greenback gyrating as traders contemplated the details of the US jobs data, which were firm enough to deter rising recession fears but fell short of inspiring markets to unwind Fed rate cuts priced in.

Looking ahead, forex traders will likely keep their attention focused on the dominating themes of monetary policy expectations and global GDP growth outlook to determine the US Dollar’s next direction. Keep an eye out for trade war headlines with US-China trade talks set to resume next week and the lurking potential of EU tariff retaliation. Also, high-impact event risk stemming from closely watched economic data releases like US inflation and consumer sentiment reports as well as central banker commentary on deck next week stand to jolt USD price action.

US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (APRIL 12, 2019 TO OCTOBER 04, 2019)

US Dollar Index Price Chart Technical Analysis

Chart created by @RichDvorakFX with TradingView

Shifting gears to the US Dollar’s technical backdrop, we see that the DXY Index continues to tread water above confluent support provided by its 23.6% Fibonacci retracement level of its bullish leg since late June. Should this area of technical support give way, US Dollar bulls could look to the 20-day simple moving average (SMA) to potentially keep the world’s reserve currency afloat. Beneath this area, the next technical level of support that comes into focus is the greenback’s 50-DMA, which is also underpinned by its 38.2% Fib and rising support trendline extended from the June 25 and August 23 intraday swing lows.

USD – FOREX ECONOMIC CALENDAR

US Dollar Forex Economic Calendar October 2019

The DailyFX Economic Calendar details the high-impact event risk and data releases faced by the US Dollar next week. Forex traders will likely tune in to commentary from Federal Reserve Chair Jerome Powell this coming Tuesday and Wednesday at 17:50 GMT and 14:30 GMT respectively. The head central banker’s latest remarks on the US economy and Fed monetary policy outlook will likely sway the market’s FOMC rate cut expectations and the US Dollar in turn.

Also, the September Fed meeting minutes will be released next Wednesday at 18:00 GMT, which could detail FOMC member deliberations on the recent repo market drama and the central bank’s plans for resuming organic balance sheet growth. Moreover, the US consumer price index (CPI) data will be released on Thursday at 12:30 GMT while the latest UofM consumer sentiment report is slated to cross the wires Friday at 14:00 GMT.

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

US Dollar Currency Volatility Implied Trading Ranges Chart

Among the G10 currencies, GBP/USD is expected to be the most volatile forex pair next week.

EUR/USD implied volatility appears sluggish seeing that EU retaliation in response to US President Trump’s latest trade war now being waged on the Eurozone following the WTO Airbus case ruling looms.

USD/CNH will likely be in the spotlight next week as US-China trade talks are set to resume. I have previously pointed out how the Chinese Yuan can serve as a US-China trade war gauge, which can be used to infer changes in expectations for FOMC monetary policy decisions and the market’s risk appetite.

This also brings AUD/USD into focus seeing that the Aussie is closely tied to the Chinese economy as well as sentiment-driven USD/JPY. I recently noted how the prospect of further Fed cuts could fuel a Yen breakout.

Additionally, the low USD/MXN implied volatility of 8.15% stands out considering it ranks in the bottom 6th percentile of readings over the last 12-months and Mexico inflation data is also on deck for release next week.

US DOLLAR RISK REVERSALS (1-WEEK)

US Dollar Skew Risk Reversals Chart

It is important to note once again that the DXY US Dollar Index composition is weighted 57.6% to EUR/USD, 13.6% to USD/JPY and 11.9% to GBP/USD. As such, US Dollar risk reversals for the 1-week tenor point to a bearish bias among forex options traders on balance.

A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection).The IG Client Sentiment Report, which details client positioning across a variety of currencies and assets, is updated in real-time and also provides insight on the bullish or bearish biases of traders.

-- 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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