US Dollar Volatility Spikes as GBP/USD Tumbles, USD/CAD Climbs
US DOLLAR OUTLOOK: GBP/USD PRICE ACTION SLIDES, USD/CAD ADVANCES AS VOLATILITY POPS TO START 2021
- US Dollar traded mixed on Monday and left the DXY Index roughly flat for the session
- GBP/USD price action dropped sharply with the UK facing another national lockdown
- USD/CAD eyed as a candidate for elevated volatility with high-impact event risk in focus
- Learn more about analyzing currency volatility and implied volatility trading strategies
Markets teed off the new year with a continuation of the bearish US Dollar narrative at the APAC open. US Dollar selling pressure accelerated once Europe came online and propelled the DXY Index lower by about -0.5% intraday, but the US Dollar clawed back lost ground as trading progressed.
The mid-day bid beneath USD price action seemed to correspond with a deterioration in market sentiment that likely stemmed from resurgent covid concerns. On balance, the US Dollar is set to close out the first session of 2021 practically unchanged gauging by DXY Index performance.
DXY - US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (08 OCT 2020 TO 04 JAN 2021)
Taking a look across the major currency pairs, we see that US Dollar strength was notable relative to its Pound Sterling and Canadian Dollar peers, though this was widely offset by weakness against the Euro. GBP/USD price action sank 150-pips from session highs as markets digested news that the UK is bracing for another national lockdown set to take effect Tuesday, 05 January. USD/CAD pivoted 120-pips higher off intraday lows as bears failed to sustain a push below the 1.2700-price level. EUR/USD rates whipsawed similarly.
That all said, the broad recovery staged by USD price action throughout the session appears to have formed a bullish hammer candlestick on a daily US Dollar Index chart. This brings to focus potential for an protracted reversal higher. A close above the 20-day simple moving average might invalidate the standing bearish trend and possibly motivate US Dollar bulls to test technical resistance posed by the 91.05-price level. On the other hand, US Dollar selling pressure could re-accelerate if the DXY Index breaches its 04 January intraday swing low.
USD PRICE OUTLOOK - US DOLLAR IMPLIED VOLATILITY TRADING RANGES (OVERNIGHT)
US Dollar implied volatility readings have turned higher since a lull over the holidays. Larger-than-expected swings across USD price action recently could also be inflating the figures. Not to mention, the week ahead showcases several catalysts for volatility lurking on the horizon with potential to weigh materially on the direction of the US Dollar. This might warrant relatively more stringent risk management techniques until the dust settles and clarity emerges in the wake of high-impact event risk that looms.
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.