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US Dollar Outlook: Fed Meeting in Focus as Tariff Deadline Looms

US Dollar Outlook: Fed Meeting in Focus as Tariff Deadline Looms

2019-12-06 20:36:00
Rich Dvorak, Analyst
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USD PRICE ACTION EYES INFLATION DATA & FED MEETING WHILE MARKETS AWAIT TRUMP’S TARIFF DECISION, US-CHINA TRADE DEAL

  • US Dollar outlook hinges on the upcoming Fed meeting and President Trump’s decision on whether or not to move forward with levying the Dec 15 tariff tranche on Chinese imports
  • Currency volatility is set to rise judging by the jump in implied USD trading ranges amid plentiful event risk and ongoing US-China trade talks scheduled for next week
  • Enhance your market knowledge with our free Forecasts & Trading Guides available for download

USD price action continues to oscillate in a broad trading range with key fundamental undercurrents – namely Fed monetary policy and lack of volatility – juxtaposing the direction of the US Dollar. Traders could soon find clarity on where the US Dollar begins to trend next, however, with a FOMC rate review and tariff deadline both drifting into the spotlight next week.

The Federal Reserve is expected to release its latest interest rate decision and economic projections Wednesday, 11 December at 19:00 GMT while President Trump is due to decide whether to implement tariffs on goods imported from China by next Sunday, 15 December. This is in addition to the plethora of event risk detailed on the DailyFX Economic Calendar next week which could spur volatility across major US Dollar currency pairs.

US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (JUNE 12, 2019 TO DECEMBER 06, 2019)

Chart of US Dollar Index Price Outlook

Chart created by @RichDvorakFX with TradingView

Judging by performance in the DXY Index, the US Dollar is on pace to drop roughly 0.50% as the first week of December comes to an end. This includes Friday’s 0.35% rally in the US Dollar which was driven primarily by a solid jobs report as it reiterated the Fed’s less-dovish guidance regarding future monetary policy decisions.

CHART OF FOMC INTEREST RATE CHANGE PROBABILITIES

Chart of Federal Reserve Interest Rate Expectations

The US Dollar could continue enjoying a positive tailwind from firmer language communicated by FOMC officials – most recently detailed in the October Fed meeting minutes – and will likely be reiterated by Fed Chair Jerome Powell and the central bank’s updated economic projections (SEPs).

While this factor stands to keep USD price action afloat around major technical support levels, other domineering influences like the Fed balance sheet and plunging measures of volatility have potential to still steer the US Dollar lower.

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

Chart of US Dollar Implied Volatility and Trading Ranges

US Dollar 1-week implied volatility readings derived from forex options contracts churned higher over the last 5 trading days as uncertainty begins to trickle its way back into the currency market. The rise in expected currency volatility is broadly illustrated by the most recent 1-week implied volatility measures topping their given 20-day averages.

Traders will likely keep close tabs on spot GBP/USD price action going forward considering its 1-week implied volatility reading was just clocked at 18.43% ahead of the UK general election. EUR/USD and USD/CHF also come into focus with 1-week implied volatility readings of 6.34% and 6.29% respectively.

Additionally, watching the direction of the US Dollar to Chinese Yuan exchange rate (i.e. spot USD/CNH) will be paramount as US-China trade negotiators scramble to finalize a partial trade deal before the December 15 tariff tranche on roughly $150 billion of Chinese goods goes into effect.

US DOLLAR RISK REVERSALS (1-WEEK)

US Dollar Risk Reversals Chart

Broadly speaking, we find that currency options traders have a mixed bias on the US Dollar when looking at 1-week risk reversals for the major USD pairs. 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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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