Dollar Breaks Down Ahead of FOMC, but Continued Losses Unlikely
David Rodriguez
- Dollar breaks key lows ahead of FOMC decision
- Large declines in US interest rates very USD bullish
- Low volatility prices suggests further losses less likely
The US Dollar has thundered lower to start the week’s trade on similarly dramatic moves in interest rate markets, but how does this change our overall trading strategies in the days ahead of the FOMC policy decision?
The Federal Open Market Committee is set to announce policy and new forward guidance on interest rates on Sep 18, and traders are apparently making a statement ahead of the highly-anticipated decision. The 10-year US Treasury Yield thundered below trendline support and now stands near month-to-date lows, while the December, 2015 Eurodollars (interest rate) futures contract saw a massive +20pt move—its largest in 2 years.
These Dollar negatives explain recent USD weakness, but how likely is it to continue lower?
Forex Volatility Prices Rise ahead of FOMC but Remained Subdued
forex_strategy_outlook_US_Dollar_losses_less_likely_body_Picture_1.png, Dollar Breaks Down Ahead of FOMC, but Continued Losses Unlikely
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
The fact is that overall volatility prices remain low, and it seems as though traders aren’t necessarily betting on big continuation in USD declines. Our 1-week volatility index is predictably elevated ahead of the FOMC decision, but longer-dated options show muted expectations.
Our trend-following Momentum2 system thus remains our favored system as it profits on US Dollar declines. Past performance is clearly not indicative of future results, but if the USD reversal does come we think our sentiment-based strategy stands a chance to continue doing well.
Our systems have likewise done well on key Yen pairs. View the table below on our overall market biases on specific currency pairs, and sign up for e-mail updates via my distribution list for any changes to our preferences.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
forex_strategy_outlook_US_Dollar_losses_less_likely_body_Picture_2.png, Dollar Breaks Down Ahead of FOMC, but Continued Losses Unlikely
forex_strategy_outlook_US_Dollar_losses_less_likely_body_Picture_3.png, Dollar Breaks Down Ahead of FOMC, but Continued Losses Unlikely
Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.
Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.
Range High – 90-day closing high.
Range Low – 90-day closing low.
Last – Current market price.
Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.
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