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Talking Points:

- The data focus for this week will be on China, U.S. & U.K. Inflation, and Yellen testimony, as previewed by Christopher Vecchio earlier this morning.

- After spending much of January retracing Q4 trends, many U.S.D. markets are trying to claw back into a bullish posture thus far in February.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our Speculative Sentiment Index (SSI) Indicator.

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Price action in the U.S. Dollar has been fairly dramatic ever since the night of the Presidential Election. The night of the election triggered a massive reversal as buyers chased the Greenback higher, driven by the combination of a Central Bank that’s spent the past eight years supporting markets combined with the hope of fiscal stimulus taking over the growth conundrum in the United States. This led to almost two months of gains as the U.S. Dollar staged a near-historic move, breaking up to 14-year highs as we came into the New Year. But this move came-in really far, really fast, and questions about sustainability began to take over as that backdrop that had driven prices-higher began to look a bit less certain. President Trump openly questioned the ‘Strong Dollar’ policy while shedding light on the fact that many foreign trade partners have actively engaged in currency-weakness strategies; and this provided at least enough uncertainty for traders to take gains on prior long-USD positions throughout much of January.

But for most of February, the U.S. Dollar has been attempting to stage a comeback, as shown in the bullish trend-channel below that’s now retraced 38.2% of the January retracement.

U.S. Dollar (DXY): Bear Flag or Return of the Bull?

Chart prepared by James Stanley

Given the veracity of the bearish move in January, traders may want a bit of additional confirmation before declaring that the bullish trend in the U.S. Dollar is back for more than a near-term retracement. And given the Fibonacci structure of that recent bearish move, there are two zones that could be used for such a purpose, with traders awaiting for price action to break above as an indication of continuation potential.

U.S. Dollar (DXY): Bear Flag or Return of the Bull?

Chart prepared by James Stanley

For those looking to accumulate long-USD exposure, one of the more attractive candidates for that theme will likely continue to be against the Japanese Yen. When the theme of U.S. Dollar strength was running rampant in the second half of Q4 of 2016, USD/JPY was one of the more robust manifestations of that Dollar-strength as the surging Greenback was paired up with a really weak Yen. And while USD/JPY retraced for much of January, right along with the Dollar, that retracement was shallower as we only saw a 38.2% retracement as opposed to DXY’s +50% retracement move.

On the four-hour chart below, we’re looking at USD/JPY after the January retracement brought price action down to the 50% Fibonacci retracement of the long-term move in the pair, taking the 1998 high down to the 2011 low. Current price action is finding resistance at the 23.6% retracement of the ‘Abe-nomics’ move around the level of ¥114.00, and similar to how we looked at the isolated U.S. Dollar above, traders looking to accumulate long exposure can await a break of this resistance to indicate bullish continuation potential.

U.S. Dollar (DXY): Bear Flag or Return of the Bull?

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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