US Dollar Faces High Volatility but Unpredictable Direction with Fed Decision

US Dollar Talking Points:

  • The Dollar has shown a climb in volatility lately, but that hasn’t translated into clear direction
  • An attempt to retake two-year highs by DXY fell short thanks to extreme EURUSD volatility
  • Wednesday’s Fed decision will raise expectations for volatility and in turn curb progress before it

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Technical Forecast for US Dollar: Neutral

The US Dollar has shown an increase in activity these past weeks, but that hasn’t exactly translated into a more productive trend from the benchmark currency. In fact, the familiar chop that has been the hallmark of this currency over the past year is still readily apparent on higher time frame charts such as the weekly or monthly. Yet, sustained and/or rising volatility does not typically abide strict technical boundaries well. With a key event risk on the docket in the coming week (the FOMC rate decision on Wednesday at 18:00 GMT), perhaps we will see more active market participants align their views.

Starting our overview of the Greenback, it is worth looking at the most popular view of the currency with the trade-weighted DXY Index. This is the perspective that US President Donald Trump takes with the heavy weighting towards EURUSD drawing greater scrutiny of its general altitude at a two-year high – even if it is not showing consistent progress with its ‘two steps forward, one step back’ pace. The peak at the start of September is the highest for the measure since May 2017, but we have failed to retest this past week. We could potentially call the peak in the beginning of August and this past week’s – both punctuated by large upper wicks – as ‘shoulders’ on a dramatic head-and-shoulders pattern, but congestion tends to make such structures unreliable as reversal signals.

Chart of DXY Dollar Index (Daily)

Chart created with the TradingView Charting Platform

Moving the time frame to a higher scale, it is critical to remember how unusual our present condition is in the big picture. While the DXY has been remarkably consistent in its throttled trend since mid-2018, this stretch is itself very unusual. We can see in the 20-week ATR (average true range) that tentative pic up in activity from the most constrained levels since Summer 2014. In the meantime, the historical range (as a percentage of spot) is still floundering with its very controlled ascent. So, while we have some tepid climb under the market, it is nevertheless extreme in its slow tempo.

Chart of DXY Index with 20-Week ATR in Red and 20-Week Historical Range in Purple (Weekly)

DXY us dollar price chart

Chart created with the TradingView Charting Platform

Taking a different look at the Dollar, an equally weighted index of the majors that deemphasize EURUSD smooths out the unproductive volatility these past few months that makes the DXY such a difficult read. There is a more clear cut head-and-shoulders with a more ‘mellow’ right shoulder. This reflects a more practiced staging before a major event risk that could trigger break and conjoin technicals with fundamentals to support trend – if the data supports the development.

Chart of Equally-Weighted Dollar Index (Weekly)

us dollar price chart dxy

Chart created with the TradingView Charting Platform

There is no mistaking the key event for the week ahead. The FOMC rate decision is one of the ‘quarterly’ events in which the group not only announces rates, but it also updates its forecasts for its policy path and the economy. The ECB decision this past week has also stirred the waters to raise the monetary policy bar and focus the market’s attention more distinctly. Below, we see that the forecast for rate cuts derived from Fed Funds futures (December 2019 and December 2020) have dramatically reduced their outlook. Just as the rise in dovish expectations in the past 12 months failed to pull the Greenback lower, the sudden reversal has been met with similar ambivalence. That said, this rest can now allow for surprise to the upside or downside and thereby prove more conductive a spark.

Chart of Dollar Index with Expected Rate Cuts Through Dec 2019 and Dec 2020 (Daily)

us dollar price chart

Chart created with the TradingView Charting Platform

Pulling out two top Dollar pairs, the first I would highlight would be EURUSD. The world’s most liquid currency pair reflects the general position of its top individual currency well. Unlike the broader performance of the Greenback, the 20-day ATR these past 8 months is significantly lower than what we had seen in the previous 8 months. A break seems ripe with the descending wedge former since the beginning of July. Resistance is a trendline and 50-day moving average at 1.1100 while support is the double bottom at 1.0925.

Chart of EURUSD with 50-Day Moving Average and 20-Day ATR (Daily)

eurusd price chart

Chart created with the TradingView Charting Platform

If you hold a bearish outlook for the US currency already – risky to take a stance preemptively ahead of the Fed though – then there are a few pairs that are already attempting a turn. USDJPY and AUDUSD are interesting for different reasons but have larger patterns that they are trading within. I am more drawn to GBPUSD where the break of its multi-month descending channel at 1.2300 turned into the clearance of the 50-day moving average and then a break above 1.2400 with gusto that itself can be interpreted as a ‘neckline’ break to an H&S. Trends in these markets are less common, but in the event such a shift is coming, this is not far into the early move.

Chart of GBPUSD with 50-Day Moving Average (Daily)

gbpusd price chart

Chart created with the TradingView Charting Platform

For speculative positioning, the Dollar isn’t offering any extreme contrarian signals or reflecting pressure build up. The large futures traders measured by the CFTC are sporting a net long position in general, but exposure has trended lower since the beginning of the year in contrast to price. Retail positioning seems more than comfortable in trading range swings. That said, keep an eye on the speculative anticipation should we near a technical boundary – particularly if we start to push through one.

Chart of Net Speculative Positioning in Aggregate Dollar Futures from CFTC Report (Weekly)

us dollar basket price chart dxy

Chart of Retail Trader Positioning from IG Clients (Daily)

US Dollar Faces High Volatility but Unpredictable Direction with Fed Decision

See how retail traders are positioned in the US Dollar, EURUSD, GBPUSD and USDJPY along with other key FX pairs, indices and oil on the DailyFX Sentiment page.

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