Powell, Stimulus, Chairman of the Fed for the US Dollar

OUTLOOK IN US DOLLAR: EUR / USD PRICE ACTION BUILT ON POWELL’S TESTIMONIAL, BIDEN STIMULUS OFFERS

• EUR / USD price action moves up to monthly highs after recent consolidation
• DXY index under pressure once again as bulls abandon 50-day simple moving average
• US Dollar Looks To Treasury Yields, Stimulus Talks And Fed Chairman Powell For Guidance
• Sharpen your technical analysis skills or learn more implied volatility trading strategies!

The US dollar is trading on its hind foot to start the week. The selling pressure of the US dollar was felt on most of the major currency pairs such as EUR / USD, GBP / USD and USD / JPY. Despite a lukewarm appetite for risk in equities during the session, it looks like the latest wave of US dollar weakness is largely following the trend reflation trade theme as sovereign yields rise and crude oil soars. Overall, the larger DXY index fell -0.3% to the price level of 90.10.

INDEX PRICE TABLE IN US DOLLAR: DAILY FRAMEWORK (NOV 25, 2020 TO FEB 22, 2021)

Graph by @RichDvorakFX created using TradingView

Heavily biased towards EUR / USD price action with a weight of 57.6%, the DXY index has fallen significantly over the past two weeks and has just closed below its 50-day moving average. During this time, it appears that a head and shoulder inversion pattern has formed. Another push of the US dollar bears below the 90.00 grip could confirm a break in neckline support. If this materializes, it could motivate a follow-down lower and highlight the lower Bollinger Band as a potential downside target. If bulls in the US dollar can recover the 50-day moving average, however, another look at the February 17 swing high could come into play.

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

Overnight implied volatility readings for some US dollar currency pairs have risen and are perched above their respective 20-day averages. Although, when looking at 12-month percentile rankings, the implied volatility of the US dollar remains relatively moderate. The event risk posed by Fed Chairman Powell’s semi-annual testimony to Congress, due to begin Tuesday, February 23 at 3:00 p.m. GMT, appears to be a potential catalyst for currency volatility.

It is highly likely that President Powell will reiterate the Federal Reserve’s ultra-dovish stance and the need for more fiscal stimulus. Nonetheless, traders might have a listening ear for possible remarks on the FOMC’s desire to keep borrowing costs low amid the recent rise in Treasury yields. Another potential driver of U.S. dollar volatility includes progress in passing the $ 1.9 trillion fiscal stimulus package proposed by President Joe Biden. The US dollar could strengthen a bit if acceleration on the way to finalizing a stimulus deal is encountered, although this may prove short-lived.

— Written by Rich dvorak, Analyst for DailyFX.com

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