DXY's round trip stalls, bulls eye 38.2% retracement prospects

  • DXY on the comeback ina classic Fibo retracement. 
  • Positioning favours the upside as CIVID risks are once again taking precedence.

The US dollar gained at the start of the week, measured by the DXY which is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

It is a weighted geometric mean of the dollar's value relative to following select currencies:

  • Euro (EUR), 57.6% weight.
  • Japanese yen (JPY) 13.6% weight.
  • Pound sterling (GBP), 11.9% weight.
  • Canadian dollar (CAD), 9.1% weight.
  • Swedish krona (SEK), 4.2% weight.
  • Swiss franc (CHF) 3.6% weight.

Monday was a choppy day on a holiday-shortened week, but the news of a fast-spreading new coronavirus strain prevalent in Britain prompted investors to seek safety in the greenback.

The dollar index hit a 10-day high in London at 91.01 but then turned lower on the day to finish up the New York session at 90.07. 

A number of factors have been in play, from overstretched positing data to hard macro fundamentals that include stimulus, Brexit risks and covid. 

GBP was a major contender in the dollar's rise as two-year British government bonds dropped to a record low while Brexit remained up in the air. 

Meanwhile, as the day went by the US fiscal package started to take up some of the spotlight which stripped the safe-haven bid out of the greenback. However, this is already baked into the markets that are fully anticipating the package. 

The MSCI's gauge of stocks across the globe IACWI, which is a useful barometer for risk appetite, has declined 0.81. 

Covid taking precedence

The US dollar has traditionally been the currency of choice during negative covid twists and turns. 

The fact that new coronavirus strain has only just emerged and that is said to be up to 70% more transmissible than the original is highly concerning.

It has already put some 16 million Britons under tougher lockdowns and prompted several countries to shut their borders to the UK. 

Meanwhile, looking at the latest positioning of the US dollar, compared to the components of the DXY, we can see that 

Net short USD positions have leapt to their highest levels since March 2011. However, there are clear signs of fraying sentiment this week and positing squaring is on the cards.

This might mean that the downside in the dollar is going to be capped into the year-end. 

''Going forward it is possible that risk appetite could be kept in check by the realisation that economic data are likely to worsen before they improve,'' analysts at Rabobank argued. 

DXY technical analysis

It is not unusual to see such volatile moves at this time of year when volumes are thin, but price action analysis during such fundamentally driven markets can be futile, especially while liquidity dries up.

Nevertheless, traders might expect a 38.2% Fibonacci retracement following this uninterrupted move to the downside:

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