USD Price Outlook: US Dollar Flops As Stimulus Deal Fuels Bears

The US Dollar recoiled lower and wiped out all of its gains on Monday after surging 1% at the start of the trading session. USD price action strengthened initially on the back of growing coronavirus concerns as lockdowns mount and evidence of a new variant roils market sentiment. A sharp advance by the broad-based DXY Index was likely exacerbated by Pound-Dollar weakness. US Dollar bears stood their ground, however, as trader risk appetite recovered throughout the trading session.

The intraday reversal looked fueled by markets remaining optimistic on the vaccine rollout, combined with news that Congress is finally set to vote on a $900-billion coronavirus aid package this evening after months of negotiations. Also, spot GBP/USD price action, which is the third-largest component of the DXY Index, retraced almost all of its 300-pip slide on word that UK Prime Minister Boris Johnson intends on making a last-ditch push for a Brexit deal with compromise on fisheries.

DXY - US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (24 AUG TO 21 DEC 2020)

DXY Index Price Chart US Dollar Technical Outlook

Chart by @RichDvorakFX created using TradingView

Turning to the charts, the short-lived rally staged by the US Dollar Index fizzled out with a rejection of its 20-day simple moving average and month-to-date highs. The Greenback also failed to close above its short-term 8-day simple moving average as bears look to retain control. This follows the Fed reigniting the US Dollar free fall last week. That said, if the S&P 500-derived VIX Index continues to climb as market sentiment deteriorates, the safe-haven US Dollar could stay in demand more broadly.

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

(Click on image to enlarge)

USD Price Chart US Dollar Implied Volatility Trading Ranges

As one might expect, US Dollar implied volatility readings have accelerated owing to the notable intraday swings across USD price action. GBP/USD is expected to be the most volatile major currency pair with an overnight implied volatility of 19.7%.

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