USD PRICE OUTLOOK: YEAR-END DEMAND FOR US DOLLARS PUSHES DXY INDEX TO 2-WEEK HIGH, BUT DEATH-CROSS THREATENS RECENT REBOUND
- The US Dollar could quickly pivot back lower against major currency pairs if a critical technical level prevents a sustained rebound attempt in the Greenback
- Currency volatility is projected to fall next week judging by 1-week implied USD price action derived from forex options contracts with the US holiday season kicking into full gear
- IG Client Sentiment provides real-time insight on market positioning and the bullish or bearish biases of traders on several currencies, commodities and equity indices
The US Dollar staged a healthy rebound attempt over the last several trading days with the DXY Index – a popularly referenced basket of major USD currency pairs – advancing to its strongest level since December 06.In addition to lingering US-China trade deal optimism, overall solid US economic data has helped chisel away at FOMC rate cut expectations.
Another fundamental driver of the US Dollar this time of year that can partly explain the recent rise in USD price action is year-end demand, which has contributed to repo funding pressures. The recent rise in the US Dollar could also be technically explained with the 96.75 price level likely serving as a springboard for the Greenback’s bounce higher that I pointed out in this US Dollar outlook.
US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (JUNE 2019 TO DECEMBER 2019)
Chart created by @RichDvorakFX with TradingView
This week could provide clarity on whether the rebound in the US Dollar will last or be short lived with the DXY Index approaching a key level of technical resistance. This area of confluence that may keep a lid on further upside in the US Dollar Index is highlighted by its 50-day and 200-day simple moving averages, which seem to be foreshadowing a bearish death cross.
The 38.2% Fibonacci retracement level of the US Dollar Index’s trading range since its year-to-date high could also keep a lid on further upside in the US Dollar. Although, the downward-sloping trendline that connects the October 03 and November 29 swing highs, which roughly aligns with the 98.00 handle, could also be looked to as a potential area of confluent resistance.
US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (1-WEEK)
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One potential headwind faced by the US Dollar during this holiday week of low liquidity is the plunge in expected currency volatility, which could be attributed to the historically quiet period that surrounds the Christmas holiday. On the contrary, seasonal demand for US Dollars headed into year-end could keep USD price action afloat – even as the Fed injects billions of dollars via repo operations (boosting the supply of USD).
Nevertheless, the lack of liquidity this week and conflicting fundamental undercurrents could potentially provide forex traders with range trading opportunities with little catalysts for volatility scheduled on the economic calendar. 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).
-- Written by Rich Dvorak, Junior Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
