US DOLLAR PRICE ACTION EYES EUR/USD & USD/CNH AMID TRADE WARS
- The US Dollar caught bid in response to widespread risk aversion driven by uninspiring trade war headlines
- USD price action stands to be dominated by the ongoing themes of trade war risk and monetary policy uncertainty
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I noted this past Friday in my most recent US Dollar price volatility report that the US Dollar was set to oscillate around trade war developments and high-impact event risk front and center this week. So far, forex traders have weathered a series of headlines regarding the US-China trade war ahead of high-level negotiations between the two nations scheduled to resume on Thursday. Reports crossed the wires over the weekend that Chinese officials will seek to narrow the scope of trade talks amid increasing reluctance by Beijing to ink a comprehensive deal pursued by the Trump administration.
Specifically, the Chinese Commerce Ministry stated that changes to Beijing’s laws to protect intellectual property – a major sticking point of trade talks that Washington seeks to reform – “is not on the table and never will be.” China state-owned tabloid Global Times also reported that “if the US insists on a broad trade deal that contains too many core-interest related issues and forces China to make concessions, Washington will see nothing in the end.”
US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (APRIL 12, 2019 TO OCTOBER 07, 2019)
Chart created by @RichDvorakFX with TradingView
Once again signs are starting to emerge that US-China trade relations may soon deteriorate. This may encourage the Federal Reserve to continue providing monetary policy accommodation in the form of interest rate cuts, which will remain a lurking headwind for US Dollar bulls. Although, risk aversion seems to be the immediate reaction among market participants to the latest trade war headlines and has broadly bolstered the US Dollar – a favorite safe-haven currency.
From a technical standpoint, the US Dollar index was able to find support around its 20-day simple moving average and 23.6% Fibonacci retracement of the greenback’s bullish stretch since late June – key technical levels I have highlighted regularly in my daily US Dollar price volatility reports. This area of confluence near the 99.00 handle will look to keep the US Dollar afloat going forward. Below this support zone, the 50-DMA and 38.% Fib come into focus.
US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)
Looking to fundamental catalysts with potential to spark US Dollar currency volatility aside from the US-China trade war, there are several high-impact economic data releases and events listed on the DailyFX Economic Calendar that could sway USD price action. A speech from Fed Chair Powell on deck for 17:50 GMT will likely serve as the major dollar-centric source of volatility scheduled for Tuesday’s trading session, but the NFIB small business optimism survey slated for release earlier at 10:00 GMT could also warrant a reaction.
EUR/USD remains in the spotlight as tariff retaliation to the WTO Airbus ruling still looms while German industrial production and factory orders data could also weigh on the most liquid currency pair. Judging by the relatively tame EUR/USD implied volatility reading, forex options traders could be underpricing the risk that recent tariffs levied by Trump could escalate into a full-blown trade war between the US and EU.
USD/CNH implied volatility is jumping higher in light of heightened uncertainty surrounding upcoming trade talks. The latest USD/CNH overnight implied volatility reading of 6.8% ranking in the top 90th percentile of measures taken over the last 12-months. Keeping close tabs on spot USD/CNH this week is imperative considering the Chinese Yuan can serve as US-China trade war barometer, which can be used to broadly gauge market risk appetite. In turn, USD/CNH price action can be extrapolated to determine FOMC rate cut expectations and thus where the US Dollar might head next.
— Written by Rich Dvorak, Junior Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight