FX Volatility Risks Fall, But Watch Gold-Linked Currencies
- Forex volatility prices drop considerably, suggest US Dollar to consolidate
- Continued moves in Commodity Bloc nonetheless Breakout2 trading system
- We look to the Momentum2 trading strategy in other USD pairs
A sharp drop in forex volatility prices suggests that recent US dollar gains may slow, but price momentum leaves us in favor of trend-following trades in key pairs.
The Dow Jones FXCM Dollar Index recently hit its highest levels in three months, and overall market trends clearly favor continued USD gains. Yet a notable drop in FX volatility prices/expectations shows that few expect the Greenback to match its current pace, and indeed this may invite some consolidation in the FX majors—notably in the EUR/USD, USD/JPY and GBP/USD
Forex Volatility Prices Tumble to Fresh Lows, Point to US Dollar Consolidation
Data source: Bloomberg, DailyFX Calculations
Volatility risks nonetheless remain high in the Commodity Bloc—the Australian, New Zealand and Canadian Dollars—as we see substantial declines in gold prices and sympathetic moves in other commodity markets.
Thus our focus remains on the Breakout2 strategy in those currency pairs, while the trend-following Momentum2 system could continue to do well in other USD counterparts.
A key caveat is that our trading biases could change if we see a similar drop in Commodity Bloc volatility, but until that happens we’ll stick to our recent calls.
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— Written by David Rodriguez, Quantitative Strategist for DailyFX.com