David Rodriguez, of DailyFX.com, points out that the USD is stuck in a tight range vs. the euro and other major currencies, and though he thinks a substantial dollar breakout/breakdown is admittedly unlikely, it'll still be important to watch for any surprises from the US central bank.

• 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

The US dollar is stuck in a tight range versus the euro and other major counterparts. A pickup in short-term volatility suggests a breakout is possible in the week ahead.

The Dow Jones FXCM Dollar Index recently touched its highest levels in three months as the greenback surged versus the Australian dollar and other commodity-linked counterparts. Yet resilience in the euro and the Japanese yen has sparked a notable dollar pullback to start the week’s trading. And indeed, the EUR/USD exchange rate continues to trade in a very wide $1.08-$1.15 range since February; it may take a significant shift in market conditions to force a meaningful break.

A modest pickup in volatility prices suggests that the week ahead may see larger price swings than the last, particularly ahead of a highly-anticipated US Federal Open Market Committee meeting. A substantial dollar breakout/breakdown is admittedly unlikely, but it will be important to watch for any surprises from the US central bank.

Forex Volatility Prices Rise Ahead of FOMC Meeting, Point to Stronger Price Moves

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Data source: Bloomberg, DailyFX Calculations
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Our strategy bias remains on the Breakout2 strategy in certain commodity-linked USD pairs, while the potential for trend shifts in the EUR/USD suggests the Momentum2 system could do well.

See the table below for full detail on market conditions and preferred trading strategies.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

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Click to Enlarge

By David Rodriguez, Quantitative Strategist, DailyFX.com