The broader US Dollar advanced slightly during Monday’s trading session. US Dollar strength was led by EUR/USD price action, which declined by about 30-pips. This largely fueled the modest 0.13% gain notched by the DXY Index with the other major currency pairs practically flat on the day. Interestingly, the US Dollar traded on its front foot despite a notable 7-basis point drop in 10-year Treasury yields.

EUR/USD might be facing headwinds from political uncertainty in Italy as Prime Minister Giuseppe Conte looks to resign. By extension, this increases the potential risk of a snap election if a new coalition cannot be formed. Evidence of demand for safe-haven currencies like the US Dollar could have contributed to EUR/USD selling pressure also.

DXY – US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (16 SEP 2020 TO 25 JAN 2021)

Chart by @RichDvorakFX created using TradingView

The bid beneath the US Dollar seems to have corresponded with bulls defending the 20-day simple moving average on the broader DXY Index. This potential technical support level underpinning the 90.00-handle could help keep the US Dollar afloat and rebound potential in focus. That said, a breakdown below this barrier might motivate US Dollar bears to wrestle back control and set their sights on year-to-date lows. On the other hand, the 91.10-price level, roughly highlighted by the 38.2% Fibonacci retracement on the chart above, may serve as a possible area of resistance before the 100-day simple moving average comes into consideration.

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

Looking ahead to Tuesday’s trading session, we see a fairly light economic calendar in terms of potential catalysts for US Dollar volatility. Although, the IMF World Economic Outlook and consumer confidence data could impact market sentiment and move the needle. Further down the horizon, an arguably larger driver of US Dollar volatility will be the two-day Federal Reserve meeting set to kick off tomorrow.

The FOMC statement is slated for release Wednesday, 27 January at 19:00 GMT and a press conference hosted by Fed Chair Powell will follow. Focus will likely hinge on whether the Fed echoes its commitment to keeping monetary policy uber-accomodative. If the Fed takes the opportunity to convey a slightly hawkish tilt in its forward guidance, however, the US Dollar could firm considerably.