Forex Market Volatility Near-Guaranteed, Here Are Pairs We're Watching

03/17/2015 9:00 am EST

Focus: FOREX

David Rodriguez

Quantitative Strategist, DailyFX.com

David Rodriguez, of DailyFX.com, discusses the near-guaranteed forex volatility that lies ahead for the USD given this week’s highly-anticipated FOMC meeting and how his forex trading strategy, therefore, turns to high-volatility trading with a focus on these currency pairs.

  • Forex volatility prices surge ahead of highly-anticipated US Federal Reserve Meeting
  • British Pound volatility near-guaranteed on pivotal week for GBP pairs
  • Jump in volatility prices leaves our focus on Breakout2 trading strategy

Forex volatility seems near-guaranteed on a pivotal week for the US dollar. Our focus turns to high-volatility trading with a special focus on USD and GBP pairs.

Short-term volatility prices/expectations have surged to their highest since mid-January as traders predict important financial market moves on a highly-anticipated US Federal Reserve rate announcement. Recent shifts in global interest rate markets as well as the S&P 500 and broader equities make the next market moves especially significant; despite hitting record-highs in February, the S&P has now traded lower for three consecutive weeks and effective erased all year-to-date gains.

Whether or not equity markets can recover from the recent market shift may depend on the Fed’s next moves, and the overall uncertainty leaves us in favor of high-volatility trading strategies across highly-affected currency pairs.

Forex Volatility Prices Surge Ahead of Fed Meeting, Uncertainty Reigns Supreme

chart
Data source: Bloomberg, DailyFX Calculations
Click to Enlarge

The Trading Strategy Bias table below highlights which currency pairs are at especially high risk of major moves and strategies we believe appropriate to given market conditions. We are broadly shifting in favor of more volatility-friendly strategies given the fairly substantial shift in broader sentiment.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

chart
Click to Enlarge

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 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50% tells us that we are at the middle of the currency pair’s 90-day 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 volume percentile and trend indicator figures make range trading the more attractive strategy.

By David Rodriguez, Quantitative Strategist, DailyFX.com

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