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US Dollar on the Rise with FX Volatility; Sentiment Souring?

US Dollar on the Rise with FX Volatility; Sentiment Souring?

2020-05-14 17:35:00
Rich Dvorak, Analyst
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USD PRICE OUTLOOK – US DOLLAR INDEX, FX VOLATILITY CLIMB AS MARKET RISK APPETITE DETERIORATES

  • USD price action catches bid on the back of FOMC rate guidance and rising risk aversion
  • DXY Index drives deeper into the 100.00 handle as the broader US Dollar gains ground
  • US Dollar could edge higher if market sentiment continues to wane

The US Dollar is on the rise and shows potential to keep climbing post-Powell. This is considering commentary from the Federal Reserve Chair who echoed opposition to the idea of negative interest rates. Fed Chair Powell also spoke with an unencouraging tone that downplayed the prospect of a V-shape recovery from the likely unavoidable coronavirus recession, which likely provided a boost to the anti-risk US Dollar as well.

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DXY INDEX – US DOLLAR PRICE CHART: DAILY TIME FRAME (14 FEBRUARY TO 14 MAY 2020)

US Dollar DXY Index Price Chart

Chart created by @RichDvorakFX with TradingView

US Dollar strength over the preceding two trading sessions has pushed the DXY Index back above the psychologically-significant 100.00 price level. While recent Fed rhetoric against negative interest rate policy, or NIRP, likely provides a fundamental driver to steer the broader US Dollar higher, the technical backdrop also seems to bolster USD price action.

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Though the DXY Index appears relatively supported by its 50-day moving average, the US Dollar could struggle to surmount its short-term bearish trend highlighted by recent series of lower highs. As such, there is potential for USD price action to ping-pong back and forth between these key support and resistance levels.

US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (1-WEEK): EUR/USD, GBP/USD, USD/JPY, AUD/USD & MORE

USD Price Outlook US Dollar FX Volatility Implied Trading Ranges

Generally speaking, there is a direct relationship between the direction of the US Dollar and volatility. Seeing that the US Dollar reigns king as one of the top safe-haven currencies, there is a notable possibility that USD price action could remain relatively supported so long as risk-aversion lingers.

That said, implied FX volatility (i.e. expected currency volatility) has started to pick up and has potential to accelerate further – particularly if market sentiment continues to worsen. This might bode well for the US Dollar and DXY Index. Although, 1-week implied US Dollar volatility readings still remain below their average readings over the last 20 days.

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Primary drivers of US Dollar volatility going forward likely surround high-impact data releases and event risk detailed on the economic calendar. On that note, forex traders could focus on upcoming reports on US retail sales and consumer sentiment due Friday, May 15 at 12:30 GMT and 14:00 GMT respectively. This is considering the closely tracked economic indicators stand to show the magnitude of the coronavirus recession and weigh on risk appetite in turn.

Keep Reading – Stock Market Forecast: Should I Sell in May and Go Away?

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

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

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