EUR/USD Under Pressure as Volatility Ramps

EUR/USD PRICE OUTLOOK: US DOLLAR STRENGTHING AMID ACCELERATING VOLATILITY

  • US Dollar gained ground during Wednesday’s trading session as the DXY Index advanced 0.5%
  • EUR/USD gravitated 48-pips lower on the back of ECB jawboning and demand for safe-havens
  • Fed Chair Powell failed to soothe market angst by cautioning on the slowing economic recovery

The US Dollar strengthened broadly on Wednesday as market sentiment soured and steered traders into safe-haven currencies. US Dollar upside was most notable against its pro-risk Australian Dollar peer. EUR/USD price action snapped lower to the tune of 48-pips with US Dollar buying pressure exacerbating Euro weakness that stemmed from ECB jawboning. Markets moved little in their initial reaction to the latest Fed rate decision, but volatility accelerated following cautious remarks from Chair Powell about the slowing pace of the economic recovery.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (14 OCT 2020 TO 27 JAN 2021)

Chart by @RichDvorakFX created using TradingView

The influx of risk aversion catalyzed a chunky pullback across major stock indices and sent the S&P 500-derived VIX Index spiking higher. As highlighted above, and discussed in detail here, the US Dollar and VIX ‘fear-gauge’ tend to hold a strong positive relationship with one another. With the help of this fundamental catalyst, US Dollar bulls defended the 20-day simple moving average once again and also reclaimed the 8-day simple moving average.

The US Dollar rally fizzled out near its upper Bollinger Band, which might continue serving as an area of technical resistance in addition to the 38.2% Fibonacci retracement level. That said, eclipsing this barrier could bring the 100-day simple moving average into focus as a potential topside objective.

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

USD Price Chart US Dollar Implied Volatility Trading Ranges EURUSD

A US Dollar breakout may correspond with sustained risk aversion and a higher VIX. The direction of EUR/USD price action also stands to weigh considerably on the direction of the broader US Dollar seeing that the major currency pair is the largest component of the DXY Index by far at 57.6%. It is worth mentioning that month-end flows could exacerbate market moves. Further, US Dollar overnight implied volatility readings are accelerating and might warrant staying nimble with adherence to sound risk management techniques.

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High-impact event risk posed by the upcoming release of US GDP growth data for 4Q-2020, due for release Thursday, 28 January at 13:30 GMT, could accelerate volatility if the figures cross market wires materially different from forecast. A disappointing GDP print could worsen trader risk appetite, and in turn, fan volatility and boost the US Dollar. On the other hand, a better-than-expected GDP reading could recharge animal spirits and diminish demand for safe-havens.

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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