USD : Euro Centric Volatility

(Thu, 10 Dec 2020). US Dollar bears appear to have been kept at bay over the last few trading sessions as USD price action extends its rebound attempt following the steep slide to start the month. This has helped fuel a modest relief bounce by the broad-based DXY Index and unwind of its seemingly overextended move lower.

Looking closer at performance across major currency pairs for Wednesday, however, reveals the US Dollar was a mixed bag. USD price action gained ground relative to the Euro, Yen and Canadian Dollar, but retreated against the Pound Sterling.

That said, focus for the remainder of the week will likely be placed on the direction of EUR/USD and GBP/USD amid heightened event risk. The upcoming ECB rate decision due on Thursday, 10 December at 12:45 GMT, in addition to the latest Brexit headlines expected to cross market wires, stand to strongarm the direction of the broader US Dollar indirectly. This is seeing that the DXY Index has a 57.6% weight to EUR/USD and 11.9% weight to GBP/USD.

USD PRICE OUTLOOK: US DOLLAR IMPLIED VOLATILITY TRADING RANGES

High-impact event risk posed by the ECB meeting and Brexit trade talks have catalyzed a spike in overnight implied volatility readings for EUR/USD and GBP/USD. With the ECB anticipated to recalibrate its quantitative easing programs, and UK-EU negotiators still stuck at an impasse over a Brexit trade deal, the red-hot implied volatility figures come as little surprise. This could warrant greater adherence to sound risk management techniques until the dust settles and more clarity is provided on where USD price action might trend next. Options-implied trading ranges are calculated using 1-standard deviation (i.e. 68% statistical probability price action is contained within the implied trading range over the specified time frame).

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