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Sunday, October 25, 2020

US dollar index rallies ahead of mild retail sales data

  • The US dollar index (DXY) is rallying as the market reacts to the rising number of Covid-19 cases.
  • Cases have been rising in European and North American countries.
  • The index will react to US retail sales numbers that will come out at 12:30 GMT.

The US dollar index (DXY) is little changed today as traders reflect on the rising Covid-19 cases and the weak economic data from the US. It is trading at $93.80, which is in the same range it has been since yesterday.

US dollar index rallies as risks rise

Rising Covid-19 cases

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The dollar index tends to gain whenever global risks rise. Yesterday, it rose by more than 0.35% as investors reacted to the spreading second wave in the US and Europe. Germany confirmed more than 6,000 cases as Angela Merkel warned of the rising cases.


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Similarly, France confirmed 30,000 cases as Emmanuel Macron announced strict lockdowns in Paris and other cities. Spain confirmed 16,000 while Italy had more than 8,000 infections. The number of infections has also risen in countries like the United States, Canada, and Europe.

Worse, health experts believe that the worst is yet to come as the northern hemisphere moves to the cold season. That has played to the dollar index’s advantage as investors and companies move their holdings to the safety of the currency.

At the same time, the world is yet to get an effective vaccine or drug for the disease. This week, Johnson & Johnson, a leading firm developing the vaccine paused its trial as a subject got sick. Eli Lilly, a firm developing an antibody was forced to halt its studies. And, in a report yesterday, the World Health Organisation (WHO) warned that Gilead’s remdesivir had minimal impacts on patients.

US retail sales eyed

The dollar index is also reacting to the weak economic data from the United States. Yesterday, numbers from the Bureau of Labour Statistics (BLS) showed that more than 890k people applied for initial jobless claims last week. That was the highest reading since mid-August and is a sign that the economic recovery has stalled.

The dollar index will react to the US retail sales numbers that will come out at 12:30 GMT. Analysts polled by Reuters expect the data to show that the overall sales rose by 0.7% in September. They also see the core retail sales, which exclude the volatile food and energy products, rising by just 0.5%. These weak numbers are in contrast to the May increase of 18%.

They are also a sign that the US urgently needs another stimulus package. Analysts, including those at the Federal Reserve, believe that a new stimulus will help reduce the number of Americans filing for jobless claims and boost retail spending.

In addition to the sales, the dollar index will react to US industrial and manufacturing production data.

Dollar index technical analysis

US dollar index technical chart

The four-hour chart shows that the dollar index has risen from October’s low of $93.00 to a high of $93.91. After this rally, the index is in a consolidation phase. The upward trend is also being supported by the 25-day exponential moving averages and is slightly below the 23.6% Fibonacci retracement level. Therefore, I suspect that the index will continue rising as bulls aim for the next resistance at $94.20.

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