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US Dollar Price Volatility Report: EUR/USD, AUD/USD, USD/JPY

US Dollar Price Volatility Report: EUR/USD, AUD/USD, USD/JPY

2019-11-25 21:28:00
Rich Dvorak, Junior Analyst
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USD PRICE OUTLOOK EYES POWELL SPEECH, TRADE BALANCE & CONSUMER CONFIDENCE DATA FOR POTENTIAL US DOLLAR VOLATILITY

  • USD price action is mixed on balance with the DXY Index edging slightly higher throughout Monday’s trading session
  • US Dollar outlook turns to an upcoming speech from Fed Chair Powell as well as the release of trade balance and consumer confidence data
  • Check out IG Client Sentiment for details on retail trader positioning on EUR/USD, AUD/USD, USD/JPY in addition to several other currencies and markets

The US Dollar topped its 50-day simple moving average and 38.2% Fibonacci retracement level of its bullish stretch from June’s low to October’s high in a continuation of last week’s rally.

Eclipsing these technical obstacles now opens up the door for the US Dollar to extend higher and retest its month-to-date highs near the 98.45 mark when analyzing USD price action via the DXY Index.

US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (MAY 20, 2019 TO NOVEMBER 25, 2019)

US Dollar Index Chart DXY Price Technical Analysis

Chart created by @RichDvorakFX with TradingView

Upward momentum has gained pace judging by bullish divergence on the MACD indicator while the RSI recently perked back up above 50 – both of which speak to the recent resurgence of US Dollar strength.

That said, the 23.6% Fib could serve as a possible upside objective for USD bulls beyond the 98.45 price area. Aside from resistance-turned-support around the 98.25 level, technical support is provided by the 20-day SMA and positive sloping trendline connecting the November 01 and November 21 swing lows.

US DOLLAR INDEX PRICE CHART & 2S10S TREASURY YIELD CURVE SPREAD OVERLAY: DAILY TIME FRAME (NOVEMBER 30, 2017 TO NOVEMBER 25, 2019)

Chart of US Dollar Price and Treasury Yield Curve Spread

Chart created by @RichDvorakFX with TradingView

Looking beyond US Dollar technicals we find a few high-impact events on the docket for Tuesday’s trading session according to the DailyFX Economic Calendar, which have serious potential to spark volatility in the US Dollar. Aside from a speech from Fed Chair Powell, US consumer confidence data will be released for November.

The market’s response to this high-profile economic indicator stands to be reflected in the US Treasury Yield Curve spread – particularly along the 10-year and 2-year maturities – due to its usefulness in reflecting the market’s perceived recession risk.

A material miss on US consumer confidence data could cause the 2s10s curve to flatten, which has already retraced nearly 40% of its steepening since September with the Fed shifting away from a dovish approach to monetary policy in favor of a more neutral stance.

While a disappointing consumer confidence report could cause downward pressure on the Greenback as traders reassess FOMC rate cut expectations, this response may be overshadowed by an influx of US Dollar demand due to the world reserve currency’s posturing as a safe-haven.

The market’s response may also be reflected in spot USD/JPY price action considering this currency pair is particularly sensitive to changes in market sentiment and interest rate expectations.

CHART OF FED BALANCE SHEET – TOTAL ASSETS

Chart of Fed Balance Sheet Federal Reserve Total Assets

Another driver of the US Dollar is the Fed’s balance sheet growth. Daily liquidity injections dubbed ‘not-QE’ has sent the Federal Reserve balance sheet ballooning by nearly $300 billion since early September. Last week was the first week-on-week decline in total assets held by the FOMC since August.

As such, less liquidity (i.e. fewer dollars circulating in the financial system) could boost USD prices in turn. Although, the palpable dip in the Fed’s balance sheet last week is not expected to be the start of a new downtrend considering the FOMC stands ready to inject up to $120 billion daily via overnight reverse repo operations amid heightened cash market funding pressures.

CHART OF FOMC INTEREST RATE CHANGE PROBABILITIES

Chart of FOMC Interest Rate Expectations

The probability of future FOMC rate cuts continues to decline due to lingering US-China trade talk optimism, which is being exacerbated by a less dovish tone conveyed by Fed officials in last week’s publication of the October FOMC minutes. In fact, the futures implied Fed funds rate (FFR) has inched higher from 1.41% on November 01 to 1.50% for the central bank’s March 2020 monetary policy update.

US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)

US Dollar Currency Volatility EURUSD USDJPY AUDUSD

EUR/USD overnight implied volatility remains at extreme lows with its most recent reading of 3.9% falling in the bottom 15th percentile of measurements taken over the last 12-months. Similarly, I pointed out in last Friday’s US Dollar Price Volatility Report that 1-week EUR/USD implied volatility dropped to its lowest on record dating back to 1999. This seems a bit odd considering the outstanding risk that President Trump pivots his focus from levying anticompetitive tariffs on China to the EU.

The release of US Advanced Goods Trade Balance data Tuesday at 13:30 GMT could spark a reaction from POTUS who has previously spoken out against painfully high trade barriers, excessive trade deficits and a strong US Dollar making it difficult for American companies to compete. Alas, the release of this high-impact data point could act as a catalyst for volatility in the US Dollar.

On that note, USD/CAD and USD/MXN come into focus considering that Canada and Mexico are two of the United States’ largest trading partners. Meanwhile, USD/CAD and USD/MXN have been in the spotlight recently as forex traders whether the latest USMCA trade headlines. Lastly, spot AUD/USD price action will be on the radar with a speech from the RBA’s Lowe slated for 9:05 GMT.

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-- 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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