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US Dollar Drives Higher Ahead of NFP Report as Volatility Spikes

US Dollar Drives Higher Ahead of NFP Report as Volatility Spikes

2020-09-03 20:30:00
Rich Dvorak, Analyst
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US DOLLAR BOLSTERED BY RISING VOLATILITY AMID DETERIORATING MARKET SENTIMENT; USD PRICE ACTION AWAITS NONFARM PAYROLLS

  • USD price action strengthening as risk appetite deteriorates and boosts the US Dollar
  • US Dollar attempting to turn higher while the S&P 500 VIX surges with uncertainty
  • August 2020 NFP report on tap for release has potential to accelerate market volatility

The US Dollar is catching bid during Thursday trade. USD price action is gaining ground on the back of broad-based risk aversion while market sentiment deteriorates. The anti-risk move also looks underpinned by a sharp spike in the VIX Index, or fear-gauge, which generally holds a strong positive relationship with the US Dollar Index. Generally speaking, this can be explained by the US Dollar’s posturing as a top safe-haven currency.

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US DOLLAR PRICE CHART WITH VIX INDEX OVERLAID: DAILY TIME FRAME (27 MAR TO 03 SEP 2020)

US Dollar Price Chart VIX Index Overlaid

A sequential decline in services PMI data released this morning likely helped fuel the latest rise in demand for cash and downside protection as stocks falter. The US Dollar surrendered most of its intraday gains, however, after the DXY Index failed to take out technical resistance posed by the 93.00-price level.

DXY INDEX PRICE CHART: DAILY TIME FRAME (05 JUN TO 03 SEP 2020)

DXY Index Price Chart US Dollar Outlook

The broader US Dollar has edged modestly higher over the last three trading sessions, but short-term buoyancy now conflicts with the series of lower highs forming a bearish channel over the last few weeks. That said, USD price outlook going forward largely hinges on the upcoming release of nonfarm payrolls data and how markets choose to interpret the monthly jobs report.

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USD PRICE OUTLOOK: US DOLLAR IMPLIED VOLATILITY TRADING RANGES (OVERNIGHT)

USD Price Outlook US Dollar Implied Volatility Trading Ranges for August 2020 Nonfarm Payrolls Report Release

The August 2020 NFP report due this Friday, September 04 at 12:30 GMT might agitate trader sentiment further if the jobs data disappoints. In turn, this could accelerate a rebound attempt staged by the US Dollar amid rising risk aversion. Nevertheless, the bearish trend may prevail and send USD price action snapping back toward two-year lows.

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This highlights potential for the US Dollar to maintain a rough trading range defined using overnight implied volatility readings. 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).

Keep Reading: NFP - Nonfarm Payrolls Drives the US Dollar & Forex Volatility

-- 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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