The US Dollar spiked 1.5% over the last week and a half as measured by the broad-based DXY Index. USD price action strengthened amid an influx of risk aversion, which corresponded with a sharp pullback by major stock indices and notable uptick in market volatility. This deterioration in sentiment largely follows rising coronavirus concerns and heightened uncertainty surrounding the November 2020 election set to kick off on Tuesday.

US DOLLAR INDEX PRICE CHART WITH VIX OVERLAID: DAILY TIME FRAME (08 APR TO 30 OCT 2020)
The US Dollar Index has potential to continue climbing on the back of mounting risk aversion in light of its posturing as a top safe-haven currency. To that end, USD price action could strengthen across the board if the VIX extends higher next week. As market sentiment deteriorates materially, the VIX Index, or fear-gauge, typically surges. The US Dollar and VIX Index tend move in the same direction owing to their generally strong positive relationship as illustrated in the chart above. Expected volatility has potential to gravitate back lower following the election, however, if there is no contested result and appetite for risk subsequently improves. This could weigh negatively on the US Dollar in turn.

USD PRICE OUTLOOK: US DOLLAR IMPLIED VOLATILITY TRADING RANGES (1-WEEK)
USD price action is expected to be quite active next week according to the latest US Dollar implied volatility readings. Yet, in light of the jam-packed economic calendar, anticipation for larger-than-normal swings across major currency pairs comes as little surprise. On that note, it is also worth mentioning that this collision of key event risk in the week ahead threatens to exacerbate US Dollar volatility, but there is also a chance that compounded uncertainty has been largely priced in by traders already.

Aside from the November 2020 election on Tuesday, US Dollar outlook also hinges on additional dominant forces like COVID-19, the FOMC rate decision and high-impact NFP data. As such, this underscores the importance of adopting a comprehensive trading strategy that incorporates sound risk management techniques. Options-implied trading ranges are calculated using 1-standard deviation (i.e. 68% statistical probability price action is contained within the implied trading range over the specified time frame).

Reference by: Rich Dvorak, Analyst for DailyFX.com