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US Dollar Forecast: Technical Levels to Watch as Election Looms

US DOLLAR TECHNICAL OUTLOOK HEADED INTO NOVEMBER 2020 ELECTION

  • US Dollar volatility is expected to accelerate dramatically as the election, event risk loom large
  • DXY Index could climb higher if the S&P 500-derived VIX extends its surge as sentiment worsens
  • USD/JPY probes key support, EUR/USD price action faces major headwinds as virus fears mount
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The US Dollar spiked 1.5% over the last week and a half as measured by the broad-based DXY Index. USD price action strengthened amid an influx of risk aversion, which corresponded with a sharp pullback by major stock indices and notable uptick in market volatility. This deterioration in sentiment largely follows rising coronavirus concerns and heightened uncertainty surrounding the November 2020 election set to kick off on Tuesday.

US DOLLAR INDEX PRICE CHART WITH VIX OVERLAID: DAILY TIME FRAME (08 APR TO 30 OCT 2020)

US Dollar Index Price Chart DXY Technical Forecast November 2020 Election VIX Fear Gauge

Chart by @RichDvorakFX created using TradingView

The US Dollar Index has potential to continue climbing on the back of mounting risk aversion in light of its posturing as a top safe-haven currency. To that end, USD price action could strengthen across the board if the VIX extends higher next week. As market sentiment deteriorates materially, the VIX Index, or fear-gauge, typically surges. The US Dollar and VIX Index tend move in the same direction owing to their generally strong positive relationship as illustrated in the chart above. Expected volatility has potential to gravitate back lower following the election, however, if there is no contested result and appetite for risk subsequently improves. This could weigh negatively on the US Dollar in turn.

USD PRICE OUTLOOK: US DOLLAR IMPLIED VOLATILITY TRADING RANGES (1-WEEK)

USD price chart outlook US Dollar implied volatility trading ranges

USD price action is expected to be quite active next week according to the latest US Dollar implied volatility readings. Yet, in light of the jam-packed economic calendar, anticipation for larger-than-normal swings across major currency pairs comes as little surprise. On that note, it is also worth mentioning that this collision of key event risk in the week ahead threatens to exacerbate US Dollar volatility, but there is also a chance that compounded uncertainty has been largely priced in by traders already.

Aside from the November 2020 election on Tuesday, US Dollar outlook also hinges on additional dominant forces like COVID-19, the FOMC rate decision and high-impact NFP data. As such, this underscores the importance of adopting a comprehensive trading strategy that incorporates sound risk management techniques. 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).

EUR/USD PRICE CHART: DAILY TIME FRAME (13 MAR TO 30 OCT 2020)

EUR USD Price Chart US Dollar Technical Forecast EURUSD November 2020 Election

Not only is EUR/USD the most liquid and heavily traded currency pair, it is also the largest component of the DXY Index with a 57.6% weighting. As such, the direction of EUR/USD price action has potential to strong-arm where the broader US Dollar heads next. EUR/USD has slid sharply lower over the last few trading sessions after failing to reclaim its 50-day simple moving average. This led to the invalidation of its bullish trendline extended from the series of higher lows throughout June and July in addition to the late September and mid-October swing lows.

Sliding beneath the 23.6% Fibonacci retracement level of its year-to-date range could open up the door to a deeper pullback by EUR/USD. Although, the 25 September bottom could provide an area of buoyancy and send EUR/USD price action recoiling back higher. Relief bounces by EUR/USD might be short-lived and undermined by the 1.8000-price level nonetheless. This is an area of technical resistance highlighted by the negatively-sloped 50-DMA and bearish trend forming from the lower highs on 31 August and 23 October.

Change in Longs Shorts OI
Daily-5%-2%-3%
Weekly41%-34%-12%

USD/JPY PRICE CHART: DAILY TIME FRAME (07 JUL TO 30 OCT 2020)

USD JPY Price Chart US Dollar Technical Forecast USDJPY November 2020 Election

USD/JPY price action appears to be forming a descending triangle pattern over the last three months. Yet, the Dollar-Yen might be turning higher within the confines of this formation in light of the latest bounce off the 104.00-price level, which could serve as a triple bottom base. The relative strength index clawing its way out of ‘oversold territory’ in addition to positive divergence on the MACD indicator hint at two constructive technical developments for USD/JPY bulls. That said, USD/JPY has potential to face selling pressure more broadly.

This is suggested by the slow-and-steady churn lower by the US Dollar against its Japanese Yen peer, which is highlighted by the downward-sloping 50-day simple moving average. Eclipsing this area of technical resistance could open up the door for US Dollar bulls to have another look at October swing highs near the 106.00-level. On the other hand, breaching confluent support around the 104.00-handle might motivate USD/JPY bears to make a quick push toward the 103.00-mark, which happens to align with its one-week implied low.

Keep Reading – US Dollar (USD) Presidential Election Performance May Prove Anything but Typical

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight