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Forex Strategy Outlook: US Dollar May Shed Gains on December Effect

The US Dollar stands to shed previous gains as financial markets gear up for a quieter end to the trading year.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

DailyFX+ System Trading Signals –Breakout Opportunities had a disappointing week, as sharp intraday breakouts did not result in extended moves. In fact the system is on one of its worst drawdowns in recent memory, and we have accordingly moved away from breakout-style trades. A drop in forex options market volatility expectations favors strategies that do well in slow-moving markets.

Thus we will shift our strategy bias towards Congestion Opportunities and adapt a counter-trend style of trading. As we discussed in this week’s US Dollar trading forecast, there is considerable risk that a stock market rally in the month of December could force a noteworthy USD correction.

It obviously serves to note that the exact opposite has happened through Monday’s trading session, but the USD continues to trade below October highs against the Euro (EURUSD lows), and we expect that a substantial breakdown is fairly unlikely.

Market Conditions:

Volatility expectations have fallen off sharply into what is typically a slower month of price action, pointing to reduced currency swings across the board. The US Dollar itself has previously benefited from elevated volatility and uncertainty surrounding financial markets; thus we might expect that the reduced vols might likewise influence the USD itself. We will position ourselves for slower market moves and reasonably steady trends into the year end.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near monthly lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s monthly range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

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