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USD Price Outlook: US Dollar Fueled by Stimulus Deal Volatility

USD Price Outlook: US Dollar Fueled by Stimulus Deal Volatility

2020-10-13 20:00:00
Rich Dvorak, Analyst
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US DOLLAR OUTLOOK: USD PRICE VOLATILITY HEIGHTENED AMID FISCAL STIMULUS DEAL NEGOTIATIONS AS PRESIDENTIAL ELECTION LOOMS

  • The DXY Index ripped higher Tuesday on the back of broad-based US Dollar strength
  • USD price action gained ground largely in response to dwindling stimulus deal optimism
  • US Dollar could rise further with EUR/USD, GBP/USD, and AUD/USD looking vulnerable
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The US Dollar appreciated against most major FX peers on Tuesday with USD strength notable against the British Pound, Australian Dollar, and Euro in particular. Greenback gains appear to largely correspond with a downshift in market sentiment as traders come to realize the unlikely probability that US politicians will deliver another coronavirus aid package before the election.

This follows pushback from Democratic House Speaker Nancy Pelosi on the $1.8-trillion fiscal stimulus deal proposed by the Trump administration last weekend, which is said to “fall significantly short of what this pandemic and deep recession demand.” House Democrats are seeking to push their own $2.2-trillion stimulus package.

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DXY INDEX - US DOLLAR PRICE CHART: DAILY TIME FRAME (05 JUN TO 13 OCT 2020)

DXY Index Price Chart US Dollar Technical Outlook

Chart by @RichDvorakFXcreated usingTradingView

Meanwhile, Republican Senate Majority Leader Mitch McConnell is planning to move forward with a vote on a targeted $500-billion stimulus bill despite the slim chance of it passing both chambers of Congress. The back and forth between politicians is likely to continue and push fiscal aid needed by many Americans further down the horizon -- perhaps even until January once the dust settles from November election aftermath.

GBP/USD BULLISH
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Change in Longs Shorts OI
Daily -26% 44% 13%
Weekly -13% 27% 12%
What does it mean for price action?
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External factors weighing negatively on EUR/USD, GBP/USD, and AUD/USD price action likely contributed to broad-based US Dollar upside as well. This latest stretch of widespread US Dollar strength propelled the DXY Index higher by 0.5% to the 93.50-price level and back above its 50-day simple moving average. A series of lower highs notched since late September appears to have developed a short-term bearish trend presents an intermittent technical obstacle for US Dollar bulls before the 94.00-handle comes into focus.

US DOLLAR PRICE CHART WITH VIX INDEX OVERLAID: 4-HOUR TIME FRAME (30 JUL TO 13 OCT 2020)

US Dollar Price Chart with VIX Index Overlaid

Chart by @RichDvorakFXcreated usingTradingView

That said, barring a breakthrough on fiscal stimulus negotiations, there could be potential for the US Dollar to extend its advance. Investor sentiment might deteriorate further and steer stocks lower as stimulus hopes continue to dissipate. This may correspond with another leg higher in the S&P 500-derived VIX Index, or fear-gauge, due to increased demand for downside protection.

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Likewise, seeing that the US Dollar is one of the top safe-haven currencies, USD price action tends to benefit as traders flock to cash when volatility accelerates and risk aversion mounts. This direct relationship is illustrated in the chart above with near lockstep moves recorded by the US Dollar and VIX Index. As such, the broader US Dollar would likely stand to recoil back lower if there were a breakdown in the VIX Index.

-- 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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