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US Dollar Outlook: FX Volatility to Rise as Liquidity Returns

US Dollar Outlook: FX Volatility to Rise as Liquidity Returns

Rich Dvorak, Analyst

US DOLLAR OUTLOOK: DXY INDEX EYES 200-DAY MOVING AVERAGE, FX VOLATILITY TO ACCELERATE

  • US Dollar edged broadly lower on Monday and pressured the DXY Index toward its 200-DMA
  • AUD/USD price action is expected to accelerate owing to event risk posed by the RBA decision
  • Sharpen your technical analysis skills or learn more about implied volatility trading strategies

US Dollar bulls have had a rough start to 2Q-2021. The broader DXY Index is already down -0.7% to trade back near the 92.50-price level as US Dollar buying pressure starts to dissipate. Fading US Dollar strength has helped EUR/USD and GBP/USD price action snap higher. Other major currency pairs like USD/JPY and USD/CAD have similarly capitalized on a softer US Dollar.

EUR/USD Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -1% -5% -4%
Weekly -11% 11% 1%
What does it mean for price action?
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Interestingly, the Greenback has faced headwinds over the last few sessions despite red-hot economic data, like nonfarm payrolls surging 916K or the ISM Services PMI hitting its highest reading on record. Not to mention, Eurodollar futures have now priced in a full rate hike from the Federal Reserve by December 2022. This could provide US Dollar bulls with an opportunity to fade recent weakness – particularly if the full return of market liquidity following Good Friday and Easter ushers along the prevailing uptrend.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (04 DEC 2020 TO 05 APR 2021)

DXY Index Price Chart US Dollar Technical Forecast

Chart by @RichDvorakFX created using TradingView

US Dollar bulls could look to defend this technical support zone around the 92.50-price level, which is highlighted by the ascending trendline200-day simple moving average. This potential area of buoyancy is also underpinned by prior resistance-turned-support from the 09 March swing high. Rebound efforts might see the upper Bollinger Band drift into focus. If a deeper push by US Dollar bears materializes, however, the 91.00-handle could come back into play.

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

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

That said, currency volatility is expected to accelerate into Tuesday’s trading session judging by overnight US Dollar implied volatility readings. Not only have overnight implied volatility readings ticked broadly higher following the holiday lull, they also trade above their respective 20-day averages for the most part. AUD/USD price action is expected to be one of the most active majors on Tuesday with an overnight implied volatility reading of 11.6%. Potential for elevated Aussie-Dollar volatility likely coincides with event risk posed by the upcoming RBA rate decision due for release 06 April at 4:30 GMT.

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-- 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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