US DOLLAR PRICE OUTLOOK: GBP/USD, AUD/USD, USD/SEK IN FOCUS AS FOMC PUMPS BALANCE SHEET
- The US Dollar is gravitating around 5-month lows as the Fed floods the market with liquidity via reverse repo operations deemed ‘not-QE’
- GBP/USD is still expected to be the most active major currency pair despite the UK General Election results in the rearview mirror as focus now shifts to the Bank of England (BOE)
- AUD/USD and USD/SEK are also anticipated to be active during Tuesday’s session as forex traders gear up for Australia jobs data and Riksbank interest rate decision
USD price action has edged steadily lower since its October 01 swing high measured via the US Dollar Index (DXY). Recent weakness in the broader US Dollar can be attributed to several factors like fading demand for safe-haven currencies as trade relations between the US and China seemingly improve or how the Federal Reserve is inflating its balance sheet at an astonishing rate.
These fundamental headwinds may linger and keep exerting downward pressure on the US Dollar. This is seeing that US-China trade officials confirmed a phase one trade deal has finally been reached between Washington and Beijing, which will likely continue to fuel appetite for risk.
US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (10 JUNE 2019 TO 16 DECEMBER 2019)
Chart created by @RichDvorakFX with TradingView
Meanwhile, the FOMC balance sheet is ballooning as the New York Fed injects billions of dollars in liquidity each day via repo operations amid the ongoing cash crunch that has kept overnight funding rates elevated. Specifically, the Fed has reversed nearly half of its quantitative tightening throughout 2018 with the US central bank pumping over $335 billion of US Dollars into the financial system since September and is a trend expected to continue into 1Q-2020.
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Shifting focus to a daily DXY Index chart reveals the general downtrend of the US Dollar since its year-to-date high to kick off the fourth quarter. Last week’s low printed by the US Dollar basket around the 96.75 price level will look to keep USD price action afloat over the short-term, but confluent support-turned-resistance around the 97.00 handle could prevent a protracted rebound attempt. Also noteworthy is the looming death-cross of the 50-day and 200-day simple moving averages.
US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)
*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). Take a look at this insight on how to trade the Top 10 Most Volatile Currency Pairs.
GBP/USD is still expected to be the most volatile major currency pair with an overnight implied volatility reading of 10.8%, which ranks in the top 85th percentile of measurements taken over the last 12-months. While the British Pound Rejoices a Tory Path to Brexit, GBP/USD price action will remain elevated as forex traders shift focus from the UK election to the BOE monetary policy update due later in the week.
| Change in | Longs | Shorts | OI |
| Daily | -20% | 36% | 7% |
| Weekly | -4% | 7% | 2% |
AUD/USD overnight implied volatility of 7.4% is noticeably above its 20-day average reading of 6.2% and could be primed for a big move with the Australian Dollar Affixed to its 200-DMA. Spot AUD/USD prices will likely continue to hinge largely on US-China trade deal headlines and upcoming release of Australian employment data.
| Change in | Longs | Shorts | OI |
| Daily | -13% | 7% | -4% |
| Weekly | -24% | 45% | -1% |
USD/SEK is another currency pair worth keeping on the radar throughout the week with the Swedish Krona at risk surrounding the Riksbank interest rate decision due Wednesday. The Riksbank is expected to voyage into unchartered waters with the central bank due to raise its policy interest rate by 25-basis points from its current -0.25% level. If the RIksbank does in fact raise rates, it will be the first central bank to unwind the unconventional negative interest rate policy adopted in response to the Global Financial Crisis.
Read More: US Dollar Outlook as FX Volatility Rises from Extreme Lows
-- Written by Rich Dvorak, Junior Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
