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USD Price Outlook: US Dollar Strength to Ebb as VIX Index Falls

USD Price Outlook: US Dollar Strength to Ebb as VIX Index Falls

Rich Dvorak, Analyst

US DOLLAR OUTLOOK: DXY INDEX PROBES KEY RESISTANCE AS VIX ‘FEAR-GAUGE’ SPIKES LOWER

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US Dollar bulls have flexed their muscles over the last few weeks. Sustained US Dollar strength since the early January swing low leaves the broader DXY Index up 1.6% year-to-date and at its highest level in eight-weeks. The US Dollar rebound looks fueled by a variety of catalysts – including rising Treasury yields, diverging economic growth trajectories, and resurfacing risk aversion.

EUR/USD price action, for example, has plunged over 300-pips from last month’s peak. At the same time, we have seen the yield on 10-year Treasuries top 1.1% and US PMI data shine bright relative to the Eurozone. Not to mention, in light of its posturing as a safe-haven currency, it is unsurprising that the US Dollar has appreciated against its peers with the S&P 500-derived VIX Index surging to its highest level since November. This generally strong direct relationship between the VIX ‘fear-gauge’ and broader US Dollar is highlighted in the chart below.

DXY – US DOLLAR INDEX PRICE CHART WITH VIX OVERLAID: DAILY TIME FRAME (MAR 2020 TO FEB 2021)

DXY Index Price Chart US Dollar with VIX Overlaid

Chart by @RichDvorakFX created using TradingView

That said, the US Dollar might face headwinds going forward as market sentiment recovers from the recent rout and sends the VIX Index sharply lower. Further, the direction of EUR/USD has potential to strongarm the broader US Dollar. This is considering EUR/USD price action is the largest component of the DXY Index with a 57.6% weighting. As such, the US Dollar could struggle to extend its advance if EUR/USD can defend the 1.2000-level, a psychologically-significant area of prior resistance-turned-support.

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

USD Price Chart US Dollar Implied Volatility Trading Ranges EURUSD GBPUSD

Shifting focus to US Dollar implied volatility readings, we see that GBP/USD price action is expected to be the most active major currency pair during Thursday’s trading session. This is judging by GBP/USD overnight implied volatility of 12.0%, which is above its 20-day average of 7.9% and ranks in the 82nd percentile of measurements taken over the last 12-months. Potential for Pound-Dollar volatility likely surrounds high-impact event risk stemming from the Bank of England interest rate decision due for release 04 February at 12:00 GMT.

Keep Reading – US Dollar Technical Forecast: DXY, EUR/USD, GBP/USD, AUD/USD

-- 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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