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US Dollar Outlook: FX Volatility Ramps as Bond Selloff Intensifies

US Dollar Outlook: FX Volatility Ramps as Bond Selloff Intensifies

Rich Dvorak, Analyst

US DOLLAR SPIKES HIGHER AMID INTENSIFYING BOND MARKET SELLOFF, ACCELERATING VOLATILITY

  • US Dollar whipsawed higher on Thursday amid elevated volatility
  • Deepening bond selloff sends the 10-year Treasury yield above 1.5%
  • Deteriorating stock market sentiment likely exacerbated USD demand
  • Learn more about technical analysis or read up on implied volatility
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The US Dollar faced heavy selling pressure early during Thursday’s session. EUR/USD price action was up about 70-pips at its intraday high, but as trading progressed, US Dollar bulls sent the major currency pair spiraling lower. The mid-day influx of US Dollar demand coincided with an acceleration in volatility, which appeared largely driven by the intensifying bond selloff.

Following a dismal auction of 7-year bonds today, Treasury yields extended their climb and worsened the EM FX bloodbath. US Dollar strength also picked up along with the S&P 500-derived VIX Index, or fear-gauge, as stocks were slammed lower. This reaction is likely owed to the 10-year Treasury yield jumping above 1.5% as it is a level that is greater than the estimated S&P 500 dividend yield.

US DOLLAR INDEX PRICE CHART WITH 10-YEAR TREASURY YIELD OVERLAID

US Dollar Index Price Chart with 10-Year Treasury Yield Overlaid

Chart by @RichDvorakFX created using TradingView

The intraday reversal staged by the broader DXY Index could give bears pause, and further stresses the 90.00-handle as a key technical support zone. On that note, downward momentum seems to have slowed judging by the MACD indicator. US Dollar bears still appear to be in the drivers seat below the 50-day moving average, however. The direction of Treasury yields might serve as a bellwether to where the broader US Dollar heads nonetheless.

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

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

Currency volatility continues to accelerate on the heels of the intensifying bond market selloff. Overnight implied volatility readings remain elevated across major currency pairs like EUR/USD, GBP/USD, USD/JPY and USD/CAD when compared to their respective 20-day averages. High-impact event risk scheduled on the DailyFX Economic Calendar for Friday’s trading session brings the release of monthly inflation data into focus as a potential catalyst for US Dollar volatility. A hotter-than-expected print on core PCE, which is the preferred gauge of inflation tracked by the Federal Reserve, might correspond with another extension of the bond selloff and bid beneath the US Dollar.

-- 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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