US Dollar Outlook Hinges on Critical Week Ahead

By David Rodriguez, Quantitative Strategist

Summary: The US Dollar stands at a crossroads as it broke lower, but we generally favor selling USD bounces . Yet the upcoming week may prove critical and could set the tone for USD trading through the foreseeable future.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

The US Dollar (ticker: USDOLLAR) recently broke substantively lower against the Euro and other major counterparts, and the coming week will likely decide whether this is the start of a broader USD downtrend. Indeed, a highly-anticipated Federal Open Market Committee meeting could indeed set the tone for Dollar trading through the foreseeable future.

FX options market volatility expectations remain low, however, and it seems that traders are positioned for relatively small moves in the EURUSD. We subsequently favor low-volatility trend trading and range trading strategies from our DailyFX PLUS Trading Signals page. If this is indeed the start of a larger US Dollar downtrend, our “Trend Follower”/Momentum1 and “Tidal Shift”/Momentum2 systems stand to do well across USD pairs.

Studies of real trader performance figures likewise show that low-volatility strategies such as “Congestion Opportunities”/Range2 and benchmark Relative Strength Index trading systems can do well in current market conditions.

It will be critical to watch US Dollar price action in the week ahead; whether or not the Greenback breaks lower could determine our trading strategy biases through the coming months of trading.

Market Conditions:

FX Options volatility expectations remain surprisingly low despite critical event risk for the Euro and US Dollar in the week ahead. Any significant surprises in key events could catch traders off-guard and produce especially large moves across major FX pairs.

The Euro/US Dollar recently surged as the US S&P 500 traded towards fresh multi-year highs. And though the short-term correlation between the EURUSD and S&P trades near lows, we believe that any substantive moves in stock markets could force similar reactions out of the Euro and US Dollar.

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