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US Dollar Outlook: USD/CAD Volatility Jumps as BoC Decision Looms

US Dollar Outlook: USD/CAD Volatility Jumps as BoC Decision Looms

Rich Dvorak, Analyst

US DOLLAR OUTLOOK: USD/CAD PRICE ACTION EYES BANK OF CANADA RATE DECISION

  • US Dollar edged lower during Tuesday’s trading session as recent strength takes a pause
  • The DXY Index is perched on the edge of short-term trend support amid firming yields
  • USD/CAD implied volatility surges ahead of the scheduled Bank of Canada rate decision
  • Learn more about technical analysis or implied volatility trading strategies
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US Dollar bulls took a breather from their recent rebound attempt on Tuesday. Remarks from Treasury Secretary nominee and former Fed Chair Janet Yellen appeared to have little impact on markets. Nevertheless, the DXY Index notched a -0.3% decline for the session as USD price action weakened slightly across the board of major currency pairs. the broader US Dollar drifted lower to probe its 8-day simple moving average, which roughly underpins the short-term bullish trend formed by a string of higher highs and higher lows since 07 January.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (24 SEP 2020 TO 19 JAN 2021)

DXY Index Price Chart US Dollar Technical Forecast

Surging Treasury yields was pegged as a primary catalyst driving the latest bout of US Dollar strength. Although, with the yield on 10-year Treasuries starting to stagnate around 110-basis points, it appears momentum is fading behind the US Dollar reversal. This is highlighted by the MACD indicator and follows a rejection of the upper Bollinger Band.

That said, defending the 8-day and 20-day simple moving averages could recharge US Dollar bulls and motivate a push toward technical resistance near the 38.2% Fibonacci retracement shown on the chart above. On the other hand, a breakdown below the 90.00-handle might suggest the resumption of selling pressure across USD price action that steers the broader US Dollar Index back toward year-to-date lows.

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

USD Price Chart Outlook US Dollar Implied Volatility Trading Ranges USDCAD

Turning to US Dollar implied volatility readings, we see that USD/CAD price action is expected to be one of the most active pairs during Wednesday’s trading session. In fact, USD/CAD overnight implied volatility just jumped to 8.2%, which is above its 20-day average reading of 6.7% and ranks in the top 70th percentile of readings over the last 12-months. This anticipated acceleration in USD/CAD volatility is likely due to the upcoming Bank of Canada interest rate decision scheduled for Wednesday, 20 January 2021 at 15:00 GMT.

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-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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