US DOLLAR OUTLOOK: USD PRICE ACTION EYES KEY CATALYSTS FOR VOLATILITY
- USD price action whipsawed Monday as weakness waned throughout the trading session
- The DXY Index inked fresh two-year lows on an intraday basis in spite of technical support
- US Dollar volatility in focus amid Brexit, stimulus talks, covid, FOMC decision and PMI data
The US Dollar endured a turbulent trading session Wednesday as early weakness morphed into strength. US Dollar bears made a push to start the week as GBP/USD price action popped on the back of UK-EU negotiators opting to extend Brexit negotiations, which largely contributed to the initial 0.63% decline notched by the DXY Index. It is likely this weighed negatively on the US Dollar more broadly and helped fuel a risk-on tone across markets. Also, the first round of coronavirus vaccine doses officially being dished out could have fostered upbeat market sentiment and exacerbated downward pressure on safe-haven currencies such as the US Dollar.
| Change in | Longs | Shorts | OI |
| Daily | -2% | 3% | -1% |
| Weekly | -5% | 11% | 0% |
DXY - US DOLLAR INDEX PRICE CHART: 4-HOUR TIME FRAME (30 NOV TO 14 DEC 2020)
Chart by @RichDvorakFX created using TradingView
That said, market optimism turned less sanguine as short-term risks that stem from mounting coronavirus lockdown measures doused broader vaccine hope with cold water. London announced its strictest tier 3 lockdown protocol and also communicated information about a new variant of the virus ‘growing at a faster pace.’ Germany revealed nonessential businesses are to close as of Wednesday with the Netherlands set to enter a full nationwide lockdown as well. New York Mayor Bill de Blasio conveyed a need to prepare for the possibility of another full shutdown.
These developments fueled the deterioration in market sentiment and helped drive the bid beneath USD price action as trading progressed throughout the session. On that note, the US Dollar Index printed a bullish engulfing candlestick on a 4-hour chart after another test of technical support around the 90.55-price level. Further, the MACD indicator suggests bearish momentum has started to wane. A topside break above technical resistance highlighted on the chart above could open up the door for bulls to target the monthly opening level around the 92.00-mark. Conversely, breaching the highlighted technical support level might motivate US Dollar bears to make a heartier push beneath the 90.00-handle with 2018 lows on the radar.
USD PRICE OUTLOOK - US DOLLAR IMPLIED VOLATILITY TRADING RANGES (1-WEEK)
Learn More - What is Implied Volatility & Why Should Traders Care?
Turning to the DailyFX Economic Calendar brings to light the abundance of potential catalysts for volatility on the docket this week. Most prominent event risk from an economic data perspective will likely be monthly PMIs and retail sales on tap for release this Wednesday, 16 December at 13:30 GMT and 14:45 GMT respectively. Additionally, the scheduled Fed meeting and rate decision due Wednesday, 16 December at 19:00 GMT will be accompanied by quarterly economic projections. If the Federal Reserve disappoints the doves and diverges from providing increasingly accommodative policies like other central banks have, it could help the US Dollar firm from current levels.
Ongoing stimulus negotiations is another possible driver of US Dollar volatility this week. Most recently, bipartisan efforts have reportedly proposed a $908-billion relief package that includes a compromise on liability protections, which has been a major sticking point leaving politicians at odds. Nevertheless, it does appear as though a material portion of US Dollar weakness attributed to an expected fiscal stimulus deal has been priced in already.
-- Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
