- US Dollar trades at pivotal support
- A Dollar breakdown could lead to much sharper market volatility
- Range trading favored, but we'll use our sentiment-based strategy to position for USD breakdown
The Dow Jones FXCM Dollar Index continues to trade at critical support levels, and the next move could be decisive.
Currencies will often make their highs and lows at the beginning and end of each calendar period; the fact that we are just now starting the fourth quarter suggests this could be a key turning point in FX pairs.
How might we trade here? 
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
Our trend-following Momentum2 trading strategy had previously done well selling into US Dollar weakness, and the system may be well-positioned to trade a USD breakdown or reversal. We like following Momentum2’s next signal on the EUR/USD, GBP/USD, USD/JPY, and other Dollar pairs.
The key caveat is that these systems might do poorly if market volatility remains especially low for an extended period of time.
Volatility prices continue to trade near year-to-date lows, and as we wrote last week such slow conditions typically favors range-trading strategies. Or in other words: buying the USD near its lows and selling near the highs.
Yet the possibility of a major US Dollar breakdown or move higher suggests we should remain nimble. We’ll position ourselves for the next major Dollar move higher or lower via our sentiment-based trading systems.
-- by David Rodriguez, Quantitative Strategist for DailyFX.com