US Dollar Outlook: USD Volatility to Rise with Fed Decision Due

• US Dollar has lacked direction so far this week as traders await Wednesdays Fed decision

• Federal Reserve officials will give markets an updated dot plot and economic projections

• DXY Index tagged its 50-day simple moving average likely due to fears of FOMC tapering

The US Dollar had another uneventful session with the broader DXY Index little changed on Tuesday. General lack of direction for USD price action so far this week is likely due to high-impact event risk posed by the Fed announcement on tap for release tomorrow. The Federal Reserve will publish its interest rate decision Wednesday, 16 June at 18:00 GMT alongside updated economic projections and fresh dot plots from FOMC officials.

Since US Dollar outlook seemed tilted to the upside three weeks ago, we have seen the DXY Index stage a decent rebound to test the underbelly of its 50-day simple moving average. Perhaps the move is explained by traders unwinding their bearish bets and positioning for the risk of a hawkish shift in Fed policy.

That said, potential shifts in the Fed dot plot and language around ‘substantial further progress’ will likely be major focal points for markets and where the US Dollar heads next. I suspect the odds are favorable for the Fed to announce the start of taper timeline discussions, which would stand to boost the US Dollar. The initial reaction could putter out, however, if Fed Chair Powell softens the blow with patient and confident rhetoric.

This ‘rip-then-dip’ scenario for the US Dollar is supported by relatively muted overnight implied volatility readings. Similarly, FX options traders pricing in comparatively-low event risk for the Fed meeting points to the likelihood that the central bank will leave monetary policy largely unchanged. To that end, if the Federal Reserve opts to echo its transitory inflation narrative, there will likely be a bearish reaction by the US Dollar.

Stay tuned on WikiFX, more news coming soon!