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US Dollar Price Volatility Report: Recession Risk Eyes Sentiment

US Dollar Price Volatility Report: Recession Risk Eyes Sentiment

Rich Dvorak, Analyst

US DOLLAR PRICE ACTION EYES CONSUMER SENTIMENT REPORT & RECESSION RISK

  • The US Dollar is showing technical signs that its recent selloff could soon be over, though fundamental themes still stand to strongarm the greenback’s direction
  • USD price action eyes consumer sentiment data ahead of next week’s FOMC rate decision
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The US Dollar extended its rebound attempt during Thursday’s trading session as counterpart weakness helped bolster the greenback. Seeing that EUR/USD and GBP/USD comprise 57.6% and 11.9% of the DXY US Dollar Index respectively, USD price action relative to the Euro and Sterling largely determines the US Dollar’s broader direction. That said, selling pressure in EUR/USD and GBP/USD amid peak Brexit uncertainty helped boost the US Dollar on balance. The US Dollar also caught bid against the Australian Dollar and Chinese Yuan following harsh remarks regarding the US-China trade war from Vice President Mike Pence.

US DOLLAR INDEX PRICE CHART: WEEKLY TIME FRAME (AUGUST 28, 2017 TO OCTOBER 24, 2019)

US Dollar Index Price Chart Technical Analysis

Chart created by @RichDvorakFX with TradingView

As noted in Wednesday’s publication of this US Dollar Price Volatility Report, which also detailed how the Fed’s balance sheet growth could serve as a major headwind for USD price action, the DXY Index is searching for confirmation or invalidation of the recent breakout from its bearish rising wedge chart pattern. Though Thursday’s marginal bounce in the US Dollar leaves the greenback’s technical backdrop largely unchanged, the US Dollar Index now appears stuck between its 50-week and 20-week simple moving averages.

For additional technical insight on USD price action, check out this article from DailyFX Strategist James Stanley who discusses US Dollar Setups: EUR/USD, GBP/USD, USD/CAD, USD/JPY.

US CONSUMER SENTIMENT & NY FED RECESSION PROBABILITY INDEX

Consumer Sentiment Fed Recession Risk Probability Chart

Shifting back to a fundamental perspective brings to focus a true-up of the University of Michigan’s Consumer Sentiment Report for October set to cross the wires Friday at 14:00 GMT. The chart above details monthly UMich Consumer Sentiment data with an overlay of the New York Fed’s Recession Probability Index (reflecting the likelihood that the US economy slips into a recession within the next 12-months). We have mentioned this several times before: the US economy is driven overwhelmingly by the American consumer. That said, sustained weakness in consumer sentiment – a leading macro indicator – could cause a systemic shift in the slowing global GDP growth narrative toward a more pessimistic outlook that reads something like ‘a recession is right around the corner.’

Nevertheless, consumer sentiment has ticked higher while the NY Fed’s recession probability index has drifted slightly lower with recent US-China trade talks dashing concerns over a looming recession. Yet a sharp deterioration in consumer sentiment stands to propel Fed rate cut bets even further, which will likely weigh negatively on the US Dollar. Although, the US Dollar tends to benefit when recession risk rises given the greenback’s posturing as a safe-haven currency. Aside from consumer sentiment, USD forex traders could watch the 2s10s (yield curve spread between the 10-year and 2-year US Treasury yields) for another potential indicator of recession risk.

FOMC INTEREST RATE CUT PROBABILITIES (DECEMBER 2019)

FOMC Interest Rate Cut Probabilities December 2019

With a third consecutive FOMC rate cut teed up as a near certainty next week judging by overnight swaps pricing, it may serve best to look at the market’s interest rate expectations for the rest of the year. According to the latest data pulled from Fed funds futures, rate traders are pricing in a 60.8% probability that Chair Powell and the FOMC will slash the central bank’s policy interest rate to a target range of 1.50-1.75% and a 33.1% probability that the Fed’s target range will be set at 1.25-1.50% by its final meeting of the year.

US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)

US Dollar Implied Volatility Trading Ranges Chart EURUSD GBPUSD USDJPY AUDUSD USDCNH

US Dollar overnight implied volatility measures have faded a bit headed into Friday’s trading session. One potential explanation for this could be due the staggering amount of risk on deck for next week according to the DailyFX Economic Calendar, which lists several high-impact events and data releases that have serious potential to move markets and steer price action.

-- 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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