US DOLLAR CURRENCY VOLATILITY REMAINS ELEVATED AS FED DECISION LOOMS
- USD price action will likely remain rangebound until the Federal Reserve (Fed) and other central banks like the Swiss National Bank (SNB) provide clarity on their latest monetary policy stances
- US Dollar implied volatility readings extend higher while monetary policy risk remains at the forefront of market themes next week
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US Dollar price action remains bogged down as Fed monetary policy uncertainty remains at large. Turbulence will likely carry over into next week and last until forex traders receive long-awaited clarity on what the FOMC and Chair Powell will announce at the Fed interest rate decision scheduled this coming Wednesday at 18:00 GMT. Yet, volatility experienced by the US Dollar may continue even after the September Fed meeting considering several other major central banks are also expected to release monetary policy updates next week.
DXY INDEX – US DOLLAR PRICE CHART: DAILY TIME FRAME (FEBRUARY 27, 2019 TO SEPTEMBER 13, 2019)
The DXY US Dollar Index is on set to close the week on its back-foot following a tear higher in spot EURUSD off of Thursday morning’s intraday low. With such a sharp move in the Euro against the US Dollar driven by the September ECB meeting, the DXY Index has slumped seeing that EURUSD comprises almost 60% of the benchmark. The US Dollar is still clinging onto technical support, however, with confluence around the 98.00-98.25 price level helping keep the DXY Index afloat.
If USD weakness accelerates ahead of the September Fed meeting, the DXY Index could look lower to its 50-day simple moving average and bullish trendline extended from the June 25 and August 23 swing lows for additional support. Conversely, if rate traders lose confidence in the likelihood that the Federal Reserve will reveal dovish action next week, the DXY US Dollar Index could test the 23.6% Fibonacci retracement of its recent bullish leg since late June.
US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (1-WEEK)
While EURUSD will likely take the spotlight seeing that it is the most liquid and heavily traded currency pair, 1-week implied volatility measures across the major US Dollar crosses draws attention to AUDUSD and USDCHF. The 1-week implied volatility reading for AUDUSD has rebounded from 5.39% on September 10, which fell in the bottom 1.1 percentile of measures over the last 12-months, with major Australian Dollar event risk and data releases. Specifically, the DailyFX Economic Calendar highlights the publication of meeting minutes from the September RBA meeting in addition to employment figures.
USDCHF 1-week implied volatility has climbed similarly in light of the market moving potential surrounding the September SNB meeting. Angst surrounding the SNB has mounted subsequent to the aggressive stimulus package announced by the ECB this past Thursday as markets contemplate the probability the Swiss will follow the lead of its European neighbors. Consequently, 6.99% 1-week implied volatility reading for USDCHF ranks in the top 90th percentile of measures over the last 12-months. On another note, GBPUSD is expected to be the most volatile currency pair next week out of the majors, but it is worth mentioning that anticipated price action has been drifting lower as Brexit fears fade.
US DOLLAR RISK REVERSALS (1-WEEK)
US Dollar risk reversal metrics paint a mixed picture of the market’s exposure headed into next week. Risk reversal readings reflect the difference between call option implied volatility and put option implied volatility. As such, a risk reversal measure above 0 indicates that implied volatility for call options is greater than that for put options, which suggests currency option traders are seeking greater protection against price swings to the upside and can indicate a bullish bias. The USDCHF 1-week risk reversal of -0.5725 is in the bottom quartile of recent readings and hints that, on balance, currency traders are expecting spot prices to fall over the coming days.
USDCHF PRICE CHART: DAILY TIME FRAME (APRIL 18, 2019 TO SEPTEMBER 13, 2019)
We noted in our weekly US Dollar technical forecast published not long ago the breakout above downtrend resistance recently printed by spot USDCHF, which underscored the US Dollar’s underlying strength and potential for uptrend continuation. Although, USDCHF upside has so far run out of steam after touching technical resistance served by the mid-point retracement of the currency pair’s bearish stretch from April 26 to August 13 and the MACD indicator appears set to roll over. If USDCHF makes another attempt to push higher, it may also be thwarted by the 200-DMA as well as the estimated option-implied upper limit of its 1-standard deviation trading range at 0.9985 noted in the US Dollar implied volatility table above.
At the same time, USDCHF bulls may look to the 50-DMA, uptrend line since August and the 23.6% Fib level to potentially support spot prices. A confirmed break above the 200-DMA or below the 50-DMAstands to foreshadow if the recent uptrend under development will continue onward or if upward momentum will reverse back lower – and next week’s central bank decisions will likely serve as the catalyst for the move. Meanwhile, US Dollar price volatility around the September Fed meeting stands to linger as markets await the FOMC’s monetary policy update and revised economic projections.
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