CURRENCY VOLATILITY – TALKING POINTS
- USD implied volatility dropped slightly as trade war headlines simmer and markets pivot to the weekend
- High-impact economic data expected next week could set up the Euro and Australian Dollar for big swings in spot prices
- Enhance your forex trading knowledge with this article on currency correlation
Implied volatility on the DXY US Dollar Index for the 1-week tenor pulled back from a reading of 6.3 percent yesterday to 5.5 percent today. The primary factors driving the fall in expected USD volatility include ‘constructive’ US China trade talks and backward-looking inflation data. As next week approaches, however, several risks still loom that could give currency volatility another jolt.
DXY US DOLLAR INDEX 1-WEEK IMPLIED VOLATILITY PRICE CHART: DAILY TIME FRAME (SEPTEMBER 03, 2018 TO MAY 10, 2019)
EURUSD is highlighted ahead of the approaching May 18 deadline for US President Trump to announce his decision to raise tariffs on auto imports. Also, the ZEW Survey of Expectations looks to provide a glimpse into the latest Eurozone sentiment readings on Tuesday while EU GDP will take the spotlight during Wednesday’s session.
While EURUSD ripped above its bearish trend after healthy advances the last two days, the reversal higher could be echoed if Eurozone economic data keeps surprising to the upside. But, if US President Trump does decide to levy tariffs on EU auto exports, the news will likely weigh negatively on the Euro and reverse recent EURUSD gains.
FOREX MARKET IMPLIED VOLATILITY AND TRADING RANGES
The Australian Dollar also looks ripe for potential price action next week with Aussie jobs data on deck. Now in the shadows of the RBNZ rate cut decision, the RBA could be set in the hot seat to follow suit – particularly if Australia employment numbers disappoint on Thursday.
Furthermore, another escalation in tension over the US China trade war could drag AUDUSD lower. Economic headwinds in China from US tariffs may translate into AUDUSD weakness considering Australia relies heavily on trade with the Chinese.
AUDUSD PRICE CHART: DAILY TIME FRAME (DECEMBER 09, 2018 TO MAY 10, 2019)
That being said, spot AUDUSD is estimated to trade between 0.6937 and 0.7061 as calculated from the currency pair’s 1-week implied volatility of 7.6 percent with a 68 percent statistical probability.
Near-side technical support eyes the 61.8 percent Fibonacci retracement level formed by the intraday low recorded during the JPY flash crash at the beginning of the year and high on January 31. On the other hand, technical resistance is posed by the 50 percent retracement line and bearish downtrend resistance.
– Written by Rich Dvorak, Junior Analyst for DailyFX
– Follow @RichDvorakFX on Twitter