EUR/USD : The Fed and Stimulus

(Tue, 23 Feb 2021). The US Dollar is trading on its back foot to start the week. US Dollar selling pressure was felt across most major currency pairs like EUR/USD, GBP/USD, and USD/JPY. Despite tepid risk appetite for equities during the session, it appears that the latest stretch of US Dollar weakness largely follows the prevailing reflation trade theme as sovereign yields climb and crude oil soars. On balance, the broader DXY Index dropped -0.3% to the 90.10-price level.

Heavily skewed toward EUR/USD price action with a 57.6% weighting, the DXY Index has pulled back considerably over the last two weeks and just notched a close below its 50-day moving average. Meanwhile, it looks like a head-and-shoulders reversal pattern may have formed. Another push by US Dollar bears below the 90.00-handle could confirm a breakdown of neckline support. If materialized, this might motivate follow-through lower and bring the bottom Bollinger Band into focus as a potential downside objective. If US Dollar bulls can reclaim the 50-day moving average, however, another look at the 17 February swing high could come back into play.

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

USD Price Chart Outlook US Dollar Implied Volatility Trading Ranges EURUSD GBPUSD USDJPY
Overnight implied volatility readings for select US Dollar currency pairs have ticked higher and are perched above their respective 20-day averages. Although, when looking at 12-month percentile rankings, US Dollar implied volatility remain relatively subdued. Event risk posed by Fed Chair Powell’s semi-annual congressional testimony scheduled to kick off Tuesday, 23 February at 15:00 GMT stands out as a potential catalyst for currency volatility.

It is most likely that Chair Powell will reiterate the uber-accommodative stance of the Federal Reserve and need for more fiscal stimulus. Nonetheless, traders might have an ear out for potential remarks on the FOMC’s willingness to keep borrowing costs low amid the recent rise in Treasury yields. Another potential driver of US Dollar volatility includes progress on passing the $1.9-trillion fiscal stimulus package proposed by President Joe Biden. The US Dollar could firm a bit if speedbumps on the road to finalizing a stimulus deal are encountered, though that may prove short-lived.

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