US dollar boosted by risk aversion

Covid-19 jitters boost US dollar

An air of caution continues to pervade currency markets ahead of the holidays and as liquidity falls sharply. Covid-19 fears saw the US dollar rise again overnight, with the dollar index rising 0.69% to 90.65. The index has fallen to 90.48 in Asia, which leaves it parked smack in the middle of its one-month range of 89.75 and 91.25.

Regional Asian currencies are unchanged across the board today, after a steady PBOC CNY fixing at 6.5558. This morning, most US dollar weakness is reflected in the major currencies, with the EUR, AUD, GBP and JPY all higher by around 0.20% versus the greenback. The price action looks mostly corrective after a night of impressive dollar strength.

With liquidity falling into the holiday period, currency markets are likely to become much jumpier and more susceptible to headline surprises. With so much economic recovery good news priced into currency markets, the dollar strength side of the equation is likely to be the path of least resistance over the holiday period.

Sterling continues to lead currency markets on the volatility front, driven by international border closures due to the Covid mutation in the UK and the ongoing Brexit trade talks. With only eight days left to find a path forward, time is rapidly running out. Currency markets continue to price in Brexit trade deal success. Failure, combined with low holiday liquidity, could make for emotional times ahead for sterling long positioning.

Sterling is likely to trade quickly to 1.2500 in the event of a Brexit failure. Until then, playing the 1.3200 to 1.3500 range continues to be the preferred strategy if one insists on being engaged at all. The 1.3100 region is the critical long-term support level for GBP/USD, containing the 100-day moving average (DMA) and a multi-month supporting trend-line. A daily close below 1.3100 will be an ominous technical development.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.