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USD Forecast: US Dollar at Risk as the Fed, GDP Loom – Charts to Watch

USD Forecast: US Dollar at Risk as the Fed, GDP Loom – Charts to Watch

2020-01-28 20:18:00
Rich Dvorak, Analyst
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US DOLLAR FORECAST: USD PRICE ACTION TURNS TO THE FED MEETING & GDP DATA ON TAP AS CORONAVIRUS-INDUCED VOLATILITY EBBS

  • USD prices could be pressured lower if the FOMC reiterates its plans to continue organic balance sheet expansion to a similar magnitude of past QE phases for reserve management
  • Fundamental outlook for the US Dollar may sour if the Federal Reserve underscores an accommodative bias with intent on keeping interest rates on hold this year
  • Fed Chair Powell could strike an upbeat tone on the US economy owing largely to a healthy consumer, but 4Q-2019 GDP data due Thursday could weigh more heavily on the Greenback

The US Dollar keeps pressing higher into the new year with the DXY Index climbing about 1.8% and above the 98.00 handle since printing its December 31 intraday low.

While the ongoing USD rally may have been technically charged initially, overall solid economic data reported over the last month and a rise in currency volatility due to the recent coronavirus panic have provided fundamental catalysts to drive the US Dollar to eight-week highs.

USD price action faces considerable event risk on the horizon, however, with the latest FOMC interest rate decision and US GDP report slated to cross the wires on Wednesday, January 29 at 19:00 GMT and Thursday, January 30 at 13:30 GMT respectively.

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US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (AUGUST 2019 TO JANUARY 2020)

USD Price Chart US Dollar Forecast Technical Analysis

Chart created by @RichDvorakFX with TradingView

Positive divergence on the MACD is an encouraging technical signal for bullish USD prospects and nearside confluent resistance is limited with the 98.00 price level in the rearview mirror. Recent strength exhibited by the US Dollar relative to other major currency pairs has steered the RSI into the brink of “overbought territory” and could present an obstacle for further upside in the Greenback.

US DOLLAR INDEX PRICE CHART & VIX INDEX OVERLAY: DAILY TIME FRAME (FEBRUARY 2019 TO JANUARY 2020)

USD Price Chart US Dollar Forecast Technical Analysis

Chart created by @RichDvorakFX with TradingView

A sustained retracement in market volatility may also present a headwind for the US Dollar as coronavirus fears fade. This is seeing that the recent episode of risk-aversion likely helped push USD price action higher due largely to the Greenback’s posturing as a safe-haven currency.

US DOLLAR INDEX PRICE CHART & INVERTED TREASURY YIELD CURVE: DAILY TIME FRAME (MARCH 2019 TO JANUARY 2020)

USD Forecast USD Price Chart Technical Analysis

Chart created by @RichDvorakFX with TradingView

Likewise, US Dollar forex traders might also want to watch the Treasury yield curve seeing that it is frequently used by market participants to gauge recession risk and considering its general relationship with USD price action. The UST yield curve has flattened notably over the last month with the spread between the 5-year and 2-year maturities inverting.

At the same time, the interest rate differential on the 10-year and 3-month maturities has plunged from 40-bps to 11-bps. That said, changes in the slope of the yield curve and its correlation to the DXY Index following the FOMC interest rate decision and 4Q-2019 US GDP data release could serve as a possible bellwether for the broader direction of the US Dollar.

CHART OF US GDP & PERSONAL CONSUMPTION: QUARTERLY TIME FRAME, SEASONALLY-ADJUSTED ANUALIZED RATE (JANUARY 2006 TO DECEMBER 2019)

USD Forecast Chart of US GDP and Personal Consumption Historical Data

Aside from the headline US GDP figure, traders may want to take particular notice of the personal consumption component considering consumers are the cornerstone of the US economy. Evidence of unexpected weakness in personal consumption or headline GDP could prompt markets to reaccelerate future Fed interest rate cut expectations. This will likely encourage US Dollar bears to drag USD price action lower in turn.

CHART OF FOMC INTEREST RATE CHANGE PROBABILITIES: MONTHLY TIME FRAME (JANUARY 2020 TO JANUARY 2021)

USD Forecast Chart of Fed Interest Rate Change Probabilities

The Federal Reserve has communicated its intent on keeping interest rates unchanged for the time being following 75-basis points of cuts last year. That said, Fed Chair Powell could convey cautious optimism toward the US economy in his follow-up press conference, which may cause the pricing of future interest rate cut odds to unwind and propel USD prices higher.

According to the latest overnight swaps data, there is a 12% probability of a rate hike at the January 2020 Fed meeting and a 50% probability of a 25-basis point rate cut by the central bank’s July 2020 meeting.

CHART OF THE FEDERAL RESERVE BALANCE SHEET: MONTHLY TIME FRAME (JANUARY 2010 TO JANUARY 2020)

Fed Balance Sheet Chart of Total Assets Held by the Federal Reserve

Fed commentary regarding its recent balance sheet expansion via reverse repo operations is another fundamental factor with potential of strong-arming USD price action. I pointed out in a recent gold price outlook how there is potential that the upcoming Fed meeting could detail plans for a standing (i.e. permanent) repo facility.

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Another possibility according to the December 2019 FOMC minutes is expanding the universe of securities purchased by the FOMC for reserve management purposes. Correspondingly, another massive boost to liquidity and excess bank reserves could present a major headwind to the US Dollar.

USD PRICE LEVELS TO WATCH – US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)

US Dollar Price Chart USD Forecast Implied Volatility Trading Ranges Ahead of Fed Meeting and GDP Data January 2020

Take a look at this insight on how to trade the Top 10 Most Volatile Currency Pairs

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

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

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