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US Dollar Outlook: GBP/USD Breakout Eyed as Risk Rally Prevails

US Dollar Outlook: GBP/USD Breakout Eyed as Risk Rally Prevails

Rich Dvorak, Analyst

GBP/USD PRICE OUTLOOK: US DOLLAR REFLATION TRADE FUELING POUND STERLING STRENGTH

The US Dollar swooned on Tuesday and now trades in negative territory month-to-date following sharp declines over the last three consecutive sessions. US Dollar selling pressure was broad-based, though weakness relative to the Pound and Yen stood out in particular. GBP/USD price action spiked higher by about 75-pips while USD/JPY sank 65-pips.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (09 OCT 2020 TO 09 FEB 2021)

DXY Index Price Chart US Dollar Technical Forecast

Chart by @RichDvorakFX created using TradingView

On balance, the DXY Index fell over -0.5% and now hovers at a critical juncture underpinned by its 50-day simple moving average. Failing to hold this key technical support level could undermine the US Dollar rebound further and bring the bottom Bollinger Band into focus – particularly in consideration of the latest relative strength index breakdown. This wave of US Dollar weakness was largely expected as it coincided with the falling VIX, which echoes prevailing risk trends like the reflation trade theme.

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

USD Price Chart Outlook US Dollar Implied Volatility Trading Ranges GBPUSD USDJPY

GBP/USD price action now looks like it could be in the early stages of a breakout higher with technical resistance around the 1.3750-mark in the rearview mirror. That said, it appears there might be some open runway for Pound-Dollar bulls to push toward the 1.4000-handle. GBP/USD is expected to be one of the most active major currency pairs on Wednesday judging by its implied move of 54-pips. US Dollar volatility has potential to accelerate in response to commentary expected from Federal Reserve Chair Jerome Powell during his speech scheduled for Wednesday, 10 February at 19:00 GMT.

-- 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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