US Dollar Whipsaws on Fed Virus Response – USD Trade Levels

USD FORECAST: US DOLLAR GYRATES ON FED LIQUIDITY CANNON & CORONAVIRUS FEARS

• The US Dollar pivoted lower to start the week after another emergency FOMC interest rate cut and announced liquidity injection
• USD price action remains supported by demand for safe-haven currencies
• FX volatility is pushing extreme highs as the brewing coronavirus pandemic stokes risk of recession

The US Dollar took a spill during Monday’s trading session with the US Dollar Index (DXY) dropping about 0.7% to the 98.00 handle. US Dollar weakness was noticeable relative to the Japanese Yen (JPY) and the Euro (EUR) in particular, which followed news that the Federal Reserve cut rates to zero. The Fed also announced it will ramp up quantitative easing efforts with plans on injecting $700 billion of liquidity.

USD PRICE OUTLOOK – US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (1-WEEK)

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

Measurements of expected currency volatility have exploded toward extreme highs over recent weeks as USD price action grows more active amid the worsening coronavirus pandemic. In fact, one-week implied volatility readings across major currency pairs rank in the top 90th percentile of readings over the last five years.

This underscores the above-average degree of risk and uncertainty plaguing current market conditions. As such, prudent FX traders may want to consider implementing stringent risk management techniques and trading strategies until the storm passes. 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).

US DOLLAR INDEX PRICE CHART: WEEKLY TIME FRAME (OCTOBER 2017 TO MARCH 2020)

Chart created by @RichDvorakFX with TradingView

That said, downside in the US Dollar due to an increasingly dovish Fed could be offset as FX volatility returns with vengeance. This is because elevated market volatility and risk aversion tend to steer forex traders toward safe-haven currencies like the US Dollar.

Read More: VIX ‘Fear-Gauge’ Hits Crisis Highs Amid Cross-Asset Volatility Explosion

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight