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Currency Volatility: All Eyes on the Fed and US Dollar Tomorrow

Currency Volatility: All Eyes on the Fed and US Dollar Tomorrow

Rich Dvorak, Analyst

USD CURRENCY VOLATILITY & FEDERAL RESERVE – TALKING POINTS:

  • USD overnight implied volatility skyrockets to its highest reading in over a month to 8.73 percent while the DXY US Dollar Index recedes from its recent top at 98.33, a price level not seen since May 2017
  • Traders will closely look for key insight from the Federal Reserve tomorrow as markets digest the latest FOMC interest rate decision and follow-up commentary from Chair Jerome Powell on Fed policy and the US economy
  • Take a look at this article for information on the How to Trade the Top 10 Most Volatile Currency Pairs or download the free DailyFX 2Q USD Forecast for comprehensive fundamental and technical insight on the US Dollar over the second quarter

Currency market volatility has begun to rebound from the unprecedented lows experienced by traders lately. Judging by the DXY US Dollar Overnight Implied Volatility Index, forex price action appears to be trending higher. In fact, the metric has jumped to 8.73 percent, its highest level since March 20, ahead of the Federal Reserve’s FOMC meeting tomorrow.

DXY US DOLLAR OVERNIGHT IMPLIED VOLATILITY INDEX PRICE CHART: DAILY TIME FRAME (APRIL 02, 2018 TO APRIL 30, 2019)

DXY Index US Dollar Implied Volatility Price Chart

If Fed Chair Powell touts Friday’s US GDP report and other positive economic developments, it could reduce rate cut bets which are currently pricing a 67 percent probability that the Federal Reserve lowers its policy interest rate by 25 basis points before the end of the year.

On the contrary, if the Fed reiterates a patient approach and focuses on downside market risks, the odds that the FOMC decides to cut rates could be expected to move higher which would likely weigh negatively on the US Dollar.

DXY US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (AUGUST 30, 2018 TO APRIL 30, 2019)

DXY Index Price Chart Currency Volatility Trading Range before FOMC Fed Meeting

The US Dollar advanced steeply throughout April and notched its highest close since May 2017 before pulling back over the last few days. Now, the greenback’s next direction hinges largely on the relative dovish or hawkish tone from the Fed tomorrow.

That being said, the DXY Index is estimated to trade between 97.07 and 97.97 with a 68 percent statistical probability judging by US Dollar overnight implied volatility. Downside could be limited by trendline support, however, which happens to align with the 20-day moving average and 23.6 percent Fibonacci retracement level as well.

FOREX MARKET IMPLIED VOLATILITY AND TRADING RANGES

Implied currency market volatility EURUSD, USDJPY, GBPUSD, USDCHF, NZDUSD, AUDUSD, USDCADForex implied volatility USD, EUR, JPY, NZD, AUD, CHF, CAD, GBP

Currency pairs worth watching over the next 24-hours highlights EURUSD and USDJPY. The Euro just reclaimed the 1.1200 level against the US Dollar following the Eurozone’s relatively upbeat GDP report released during Tuesday’s session.

Looking to the Japanese Yen, USDJPY should be closely monitored as Japan’s financial markets remain closed in observation of its Golden Week – the lack of liquidity raises JPY flash crash risk.

Here are some additional US Dollar Price Action Setups ahead of tomorrow’s FOMC meeting and Friday’s Nonfarm Payroll Report by DailyFX Currency Strategist James Stanley.

FOREX ECONOMIC CALENDAR – USD

Forex economic calendar US Dollar April 2019 Federal Reserve FOMC Meeting

Visit the DailyFX Economic Calendar for a comprehensive list of upcoming economic events and data releases affecting the global markets.

Prior to the Fed tomorrow, the ADP Change in Employment and ISM Manufacturing Index will be released at 12:15 GMT and 14:00 GMT respectively.Although the market’s reaction to the Fed will largely dictate tomorrow’s price action, these economic indicators have potential of setting the tone for trader sentiment and risk appetite during Wednesday’s session.

TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

- Written by Rich Dvorak, Junior Analyst for DailyFX

- Follow @RichDvorakFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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