US DOLLAR CURRENCY VOLATILITY EYES SEPTEMBER FOMC MINUTES & FED CHAIR POWELL SPEECHES
- The US Dollar bounced further off technical support and could open the door to retest year-to-date highs
- September FOMC minutes and the latest commentary from Federal Reserve (Fed) Chair Jerome Powell could serve as catalysts that help propel the greenback higher
- Download our free 4Q-2019 Forecasts & Trading Guidesfor comprehensive fundamental and technical insight on the US Dollar
Markets remain on edge ahead of US-China trade talks set to kick off later this week. Terse headlines lobbed back and forth between Beijing and Washington has dented risk appetite, which is likely serving as a tailwind to US Dollar price action. The US Dollar is also gaining more broadly amid notable downside in GBP/USD and EUR/USD owing to the ongoing impasse between London and Brussels that is raising the risk of no-deal Brexit.
Also contributing to the greenback’s performance today included a much better-than-expected US small business optimism report and the latest commentary from Federal Reserve officials. Looking ahead to Wednesday’s trading session and for catalysts outside of trade wars, another speech from Fed Chair Powell is on deck in addition to the release of the September FOMC minutes – all of which stand to spark volatility in the US Dollar.
US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (APRIL 12, 2019 TO OCTOBER 08, 2019)
The daily publishing of this US Dollar price volatility report has frequently highlighted the 98.75 price level on the DXY Index – a popular basket of major US Dollar forex pairs. I noted that this area of confluence, which is also underpinned by its 20-day simple moving average, had strong potential to keep USD price action afloat.
The US Dollar Index now trades comfortably above this support zone and opens up the door to re-target its year-to-date high near the 99.50 mark. Should the aforementioned support level fail to hold once more, the US Dollar could search for support around 98.25 where the 38.2% Fibonacci retracement and 50-day simple moving average could bolster the greenback.
SEPTEMBER FOMC MINUTES & POWELL COMMENTARY SET TO JOLT US DOLLAR PRICE ACTION
The September Fed meeting revealed the central bank’s decision to cut interest rates for the second time this year – largely aiming to insulate the American economy from rising downside risks and accelerate stubbornly low inflation. The September Fed meeting press statement was accompanied by the most recent update to FOMC member economic projections, which detailed officials’ median estimate for the projected federal funds rate (FFR). Seeing that the current target FFR range falls between 1.75-2.00% and the median estimate for 2019 from Fed officials is listed at 1.90%, it appears that the central bank prefers to leave its policy interest rate unchanged for this year.
This compares to the 81.1% probability currently priced in by markets that the next FOMC meeting later this month will announce a third consecutive 25-basis point interest rate cut. Moreover, there is nearly a 50.0% chance that the target FFR will rest at 1.25-1.50% (i.e. one 50-basis point cut or two 25-basis point cuts from current FFR) by the end of the year according to the latest overnight swaps pricing pulled from Bloomberg. That said, the US Dollar faces a material upside risk considering the market’s Fed rate cut expectations appear too dovish relative to FOMC projections, which I previously noted in one of my prior US Dollar price volatility reports.
Alas, details found in the September FOMC minutes on deck for release Wednesday at 18:00 GMT could force a convergence between Fed and market expectations. Yet, it is worth mentioning that the September FOMC minutes are a bit stale and outside the scope of high-impact economic reports released since the central bank last met like dismal manufacturing and services PMI data. As such, the latest commentary from Fed Chair Jerome Powell expected at 14:30 GMT could have a stronger impact on US Dollar price action.
US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)
USD/CNH remains in focus with the US and China set to kick off their 13th round of trade negotiations later this week. While Vice Premier Liu He and other Chinese officials are set to meet with US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer on October 10-11, US-China trade war headlines are already crossing the wires which stands to strongarm market sentiment and the US Dollar. Take a look at how the Chinese Yuan can serve as a US-China trade war barometer.
On the topic of trade wars, EUR/USD must remain in focus as markets still await the response and potential retaliation to the $7.5 billion in goods Trump plans to levy tariffs on stemming from the WTO Airbus case. Also, USD/JPY and USD/CHF should be kept in the crosshairs as these particularly interest rate sensitive currency pairs could react sharply to sizable changes in dovish Fed monetary policy expectations.
US DOLLAR RISK REVERSALS (OVERNIGHT)
Ahead of Wednesday’s trading session, it appears that forex options traders have a bearish bias on the US Dollar judging broadly by overnight risk reversals. A risk reversal reading above zero indicates that the demand for call option volatility (upside protection) exceeds that of put option volatility (downside protection). The IG Client Sentiment Report, which details client positioning across a variety of currencies and assets, is updated in real-time and also provides insight on the bullish or bearish biases of traders.
Connect with @RichDvorakFX on Twitter for real-time market insight