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US Dollar Ripe for Volatility as Stocks Swing Amid Earnings

US Dollar Ripe for Volatility as Stocks Swing Amid Earnings

Rich Dvorak, Analyst

US DOLLAR EYES STOCK MARKET EARNINGS SEASON ON DECK, VIX ‘FEAR-GAUGE’ IN FOCUS

  • US Dollar Index starts the trading week on its back foot as EUR/USD advances
  • S&P 500 VIX ‘fear-gauge’ spiked Monday afternoon as stocks pivoted sharply lower
  • USD price action might rebound further if equity earnings encourage risk-aversion

The US Dollar is trading softer on balance to start the week judging by DXY Index performance. US Dollar downside looks isolated to EUR/USD price action, which is the largest component of the DXY Index and biggest driver of its direction.

Focusing on other major currency pairs – like GBP/USD, USD/JPY, or AUD/USD – reveals that the US Dollar actually strengthened more broadly. Support to the US Dollar seemingly corresponded with an afternoon reversal in the S&P 500 as stocks turned red in response to discouraging coronavirus headlines.

DXY INDEX – US DOLLAR PRICE CHART: 2-HOUR TIME FRAME (26 JUN TO 13 JUL 2020)

US Dollar Price Chart DXY Index Technical Analysis

Chart created by @RichDvorakFX with TradingView

As new virus cases explode, the trend in coronavirus-related hospitalizations and deaths have started to reaccelerate. This has enticed more Apple store closures and pushed local governments to backtrack on reopening guidelines. Most recently, the two largest public school districts in California announced that it will keep its education facilities closed this Fall as the coronavirus pandemic persists.

This apprehension of a ‘return to normal’ conveyed by politicians and big businesses amid COVID-19 threatens to weigh negatively on economic growth expectations, which is already being reflected by the S&P 500 VIX Index. The VIX Index, or fear-gauge, surged after the latest coronavirus news crossed the wires and could indicate a day of reckoning lurks on the horizon.

DXY INDEX – US DOLLAR PRICE CHART: DAILY TIME FRAME (09 APR TO 13 JUL 2020)

VIX Index Price Chart with DXY Index Overlaid

Chart created by @RichDvorakFX with TradingView

That said, potential for a larger US Dollar reversal back higher seems noteworthy. This bullish USD scenario might garner added gravity if market sentiment deteriorates further and the VIX Index continues to climb.

In addition to lingering coronavirus concerns, the highly-anticipated kickoff of S&P 500 earnings releases on deck this week is another major market theme worth keeping close tabs on. This is considering stock market earnings can have a material impact on investor risk appetite and drive demand for safe-haven assets like the USD.

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

USD Price Chart US Dollar Trading Outlook Currency Volatility S&P 500 Earnings Season Coronavirus

Last but not least, global macro event risk detailed on the DailyFX Economic Calendar for this week highlights possible catalysts for currency volatility. Implied FX volatility measurements taken on Friday’s close seem considerably low in light of S&P 500 earnings, central bank decisions from the BOC and ECB, as well as Australian employment and US retail sales data due. If these fundamental drivers worsen market sentiment, it could cause a crunch on liquidity and tighten financial conditions, which would likely provide a boost to the broader US Dollar in turn.

Read More – EUR/USD & AUD/USD in Focus Ahead of ECB, Jobs & Retail Sales

-- Written by Rich Dvorak, 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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