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February flight for the USD

A rocky start for markets this morning, as news centred on the spread of the coronavirus and modelling by the London School of Hygiene and Tropical Medicine, that projects more than 500,000 people in Wuhan, the epicentre of the outbreak might be infected by the time the virus peaks in two weeks.

The first week of February has been a tricky one. Markets have been driven by the ebbs and flow surrounding coronavirus headlines, intermixed with upbeat U.S. economic data and reports of economic stimulus from Chinese authorities.

Similar bumpy conditions are likely to prevail during the remainder of February, punctuated by the release of economic data impacted by virus inspired factory shutdowns, travel restrictions and in China’s case, Lunar New Year holidays.

In FX, the scenario outlined above has put the U.S. dollar and the DXY index front and centre on most traders' radars with a particular focus on the big dollar's status as a safe haven currency and following another round of strong U.S. economic data, including Fridays robust jobs report.

Technically, it was all one-way traffic for the DXY index last week, a trend that looks capable of continuing in coming weeks. The decline from the October 2019, 99.67 high to the 96.36,  31st of December low unfolded in three waves (abc) which implies it has been corrective. Fridays break/close above the Wave b high at 98.54 provides some confirmation the DXY’s correction is complete at the 96.36 low.

Combined with the impulsive nature of last week’s rally, there is enough evidence to suggest the DXY index should be able to retest the October 2019, 99.67 high, with risk towards 100.67. However, because the DXY, is subject to the ebbs and flows mentioned above, the safest entry for those looking to buy the DXY, would be via the next pullback, using the layer of support 97.80/70 which includes the 200-day moving average as the near term bullish reassessment level.

February flight for the USD

Source Tradingview. The figures stated areas of the 10th of February 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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