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US Dollar Outlook: AUD/USD Eyes Federal Reserve Announcement

US Dollar Outlook: AUD/USD Eyes Federal Reserve Announcement

Rich Dvorak, Analyst

US DOLLAR OUTLOOK: AUD/USD ASCENDS AHEAD OF FOMC STATEMENT DUE

  • US Dollar weakened across the board of major currency pairs during Tuesday’s trading session
  • AUD/USD price action was a top performer and likely benefited from frothy market sentiment
  • FOMC rate decision is on the docket for tomorrow though focus will likely be on Chair Powell
  • Learn more about the basics of technical analysis or implied volatility trading strategies
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The US Dollar lost altitude on Tuesday as the broader DXY Index slid -0.25% and erased prior session gains. US Dollar weakness was notable against the Pound and the Aussie with GBP/USD and AUD/USD rising 62-pips and 33-pips, respectively. The pro-risk Australian Dollar may have piggybacked on relatively rosy market sentiment – perhaps earmarked by what looks like frothy activity in GameStop’s stock price on the heels of an eye-popping short squeeze.

To be fair, as outlined in its latest World Economic Outlook update, the International Monetary Fund did upgrade its forecast for 2021 global GDP growth by 0.3% to 5.5%. This could help explain the bid beneath AUD/USD price action and lacking demand for the safe-haven US Dollar more broadly. US Dollar downside might also have stemmed from traders front-running the Federal Reserve announcement due Wednesday, 27 January at 19:00 GMT.

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DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (16 SEP 2020 TO 26 JAN 2021)

DXY Index Price Chart US Dollar Technical Forecast

Chart by @RichDvorakFX created using TradingView

Tuesday’s push by US Dollar bears steered the DXY Index back to its 20-day simple moving average near the 90.15-price mark. Breaching this potential area of technical support, which is also underpinned by last week’s low, could tee up another look at year-to-date lows. This might correspond with a bearish MACD crossover. On the other hand, if US Dollar bulls continue to defend the 90.00-handle, the 38.2% Fibonacci retracement might serve as a possible resistance level. Eclipsing the 09 December 2020 high could open up the door for a larger rebound toward the 100-day simple moving average.

JANUARY 2021 FED DECISION PREVIEW & MARKET REACTION SCENARIOS

The Federal Reserve is widely expected to leave its benchmark interest rate range unchanged at 0.00-0.25% and maintain its pace of quantitative easing at $120-billion per month. US Dollar overnight implied volatility readings have ticked higher into the risk-event, though they do appear muted overall in consideration of the upcoming Fed announcement. This suggests that markets largely anticipate no change in FOMC policy. That said, volatility could accelerate substantially if Fed Chair Jerome Powell conveys a relatively less-dovish tone with potential hints of tapering asset purchases.

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It is hard to imagine, however, that the head central banker would shift his forward guidance materially from what was communicated less than two-weeks ago. Specifically, on 14 January, Fed Chair Powell stated how “now is not the time to be talking about changes to asset purchases.” FOMC officials echoing their commitment to uber-accomodative monetary policy could correspond with a resumption of US Dollar selling pressure. Conversely, if the Federal Reserve opts to send markets a relatively more hawkish message, the US Dollar would likely strengthen in response.

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

USD Price Chart Outlook US Dollar Implied Volatility Trading Ranges AUDUSD

AUD/USD is expected to be the most active major currency pair on Wednesday judging by its overnight implied volatility reading of 12.1%. This is above its 20-day average reading of 10.3% and ranks in the top 68th percentile of measurements taken over the last 12-months. In addition to the Fed rate decision on deck, recent developments in China could indirectly weigh on the Australian Dollar and AUD/USD price action. The Aussie might face headwinds with Chinese markets coming under fire as the PBoC warns of financial bubble risks and starts to drain liquidity from the system.

-- 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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