US Dollar Price Outlook: Inflation Data to Fuel USD Volatility

US DOLLAR OUTLOOK: USD PRICE ACTION TO HEAT UP WITH INFLATION DATA DUE

• US Dollar has fallen sharply with the broader DXY Index trading near 11-week lows

• USD price volatility looks likely to accelerate as markets react to inflation data due

• AUD/USD may be the most active major currency pair judging by its IV of 12.2%

The US Dollar will likely be front and center during Wednesdays trading session. This is considering potential for US Dollar volatility to accelerate in response to monthly inflation data on deck for release. Markets are expecting headline and core inflation to cross the wires at 3.6% and 2.3%, respectively. A material upside surprise on inflation could intensify the Fed taper debate, which would likely correspond a sharp move higher in Treasury yields and the broader US Dollar. On the other hand, a relatively soft or in-line reading on inflation might be viewed as a disappointment and cause traders to unwind bets for a less-dovish FOMC.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (24 DEC 2020 TO 11 MAY 2021)

Taking a look at a daily chart of the DXY Index, we see that the US Dollar has weakened considerably over recent trading sessions. This has pushed the DXY Index down to its lowest level in 11-weeks near the 90.15-price level. US Dollar bulls seem to have stemmed the bleed here, which is an area of confluent support underpinned by the 78.6% Fibonacci retracement of the DXYs year-to-date trading range. A resumption of US Dollar selling pressure could tee up a look at the 25 February swing low before early January lows are eyed. If a rebound starts to materialize, however, the US Dollar could see a rally toward its 100-day simple moving average.

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

AUD/USD price action is expected to be the most active on Wednesday across the board of key US Dollar currency pairs. This is judging by AUD/USD overnight implied volatility of 12.2%, which compares to its 20-day average of 8.5% and ranks in the top 82nd percentile of readings taken over the last 12-months. USD/JPY price action might also be worth keeping on the radar seeing that the Dollar-Yen is particularly sensitive to changes in interest rates and inflation expectations.

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