GBP down as market braces itself for hard Brexit

I've lost conviction in my EURUSD long trade which I opened at 1.0646. I still think the pair has potential to go up to 1.07-.08 but there's no real momentum, so I'm looking for opportunities elsewhere. Closed trade at 1.0608 to realize 0.36% loss.

Sterling got pummeled during the Asian trading session as market participants are pricing in the possibility of a hard Brexit ahead of Theresa May's speech on Tuesday. I'm seeing a low of 1.1986 on BBG but with GBP short momentum still intact it wouldn't be surprising to see cable go for its "flash crash" low in the 1.1752-1.1841 range. (When it comes to flash crashes, data become somewhat unreliable. Depending on which data feed you're using and which brokers/banks are contributing prices to the feed, you will see different lows. Thin liquidity is another problem with quoted prices recorded during flash crash periods.)

Open positions as of 16/01/2017 9:00am CET: Flat

Realized YTD return: +0.7% from 2 trades

Dollar Index quarterly chart since 1964

I've got no new trade idea today, so I'm posting this quarterly chart of the DXY going all the way back to 1964. Although I'm currently short USD vs EUR following the ridiculous Trump presser, I still expect a stronger USD in the medium to long term.

Whether the DXY will test its support at 100 first or turn around and go straight for the 105 handle depends strongly on what Donald Trump and his cabinet will be doing after 20 January and how quickly they will go about it. We already know they're set on repealing Obamacare as soon as possible, but market participants are still waiting for details on Trump's promised economic stimulus package. Needless to say, pressuring American companies into adding more jobs in the U.S. is one thing, delivering real change across the board will be far more challenging.

I'm not expecting any big moves in the USD before the inauguration and hence my short-term target in EURUSD remains 1.0700-20.

DXY QuarterlyOpen positions as of 13/01/2017 1:04pm CET:
EURUSD long from 1.0646, unrealized return: flat

Realized YTD return: +1.06% from 1 trade
Total YTD return: +1.06% from 2 trades

Selling USD vs EUR & TRY

Following yesterday's disastrous Trump press conference I'm buying EURUSD at 1.0646 with a first target at 1.0720 (trendline from 2002). I'm also selling USDTRY at 3.81. Originally, I was going to buy TRY vs EUR to pick up carry but with Trump being the clown that he is I'm hoping for USD weakness in the short term.

Update 3:50 PM CET:
USDTRY short closed at 3.77 for quick 1.06% profit, EURUSD long still open

TRY slammed amid Turkey democracy worries

The TRY lost a staggering 8.9% vs. the USD year-to-date to hit an all-time low amid fears Turkey's president Erdogan might succeed in abolishing democracy in the troubled country. The currency even surpassed the Mexican peso as the worst-performing EM currency relative to the USD.

Things aren't looking much better in EURTRY with the pair hitting 4.1 during early European trading. Given that the carry is very tempting (and with the prospect of the Turkish central bank potentially having to raise interest rates later in January), I'm pondering when to go short EURTRY. However, with negative TRY momentum still going strong I'll refrain from putting on a trade at the moment. Falling knives are falling particularly fast in the case of troubled EM currencies, and I'm not going to catch this one!

The dollar will be stronger going forward

My frequent readers know by now that I've been very vocal about US dollar strength throughout this year. It is true that there have been many a times during the past 12 months when the dollar depreciated against the euro and, in particular, against the Japanese yen. That was usually the case when the Federal Reserve kept the market guessing about its future policy moves, including the timing of its first interest rate hike, or when the European Central Bank could not persuade the market of its capability to sustainably increase inflation through its monetary policies, such as negative interest rates and extensive quantitative easing programmes. However, no matter how tenacious the dollar's sideways range has been (just look at EURUSD, which had been stagnating since April 2015), I've always stuck with my conviction that the US dollar would ultimately emerge from this inconvenient bout of range trading as the stronger currency in comparison to the rest of the G10 currency basket.

The main reason being that the US economy has been able to put its economic recession behind itself earlier than European economies managed to do. This time gap of perhaps one to two years was a strong indicator of increasingly divergent fiscal and monetary policies in the US and throughout the euro zone that would help strengthen the US dollar and, on the other hand, devalue the euro. Although this did indeed happen to some degree up until March 2015 when the EURUSD exchange rate came close to reaching $1.05 but instead came to a halt at the intersection of two long-term trend lines and entered the aforementioned sideways market. I must admit that I greatly underestimated the amount of time it would take for the US dollar to resume its appreciation, and that it would be the election of Donald Trump as the next President of the United States that would trigger the dollar's renewed vigor is still somewhat beyond me.

Anyway, the time has finally come that we're seeing a strong trend in EURUSD again. The only thing that worries me at this time is the pace at which it unfolded. Within merely 10 trading days we went from the election night high of $1.13 to today's low of $1.0568 -- that's almost an eight big figure move without noteworthy backlash! The daily RSI currently reads 22 and other oscillators confirm that the pair is oversold. While I appreciate the fact that such moves often extend even beyond these levels, I must also acknowledge that the previously favourable risk-return profile of the EURUSD short trade has worsened significantly, which is exactly why I closed my USD long trades yesterday. Traders thinking about selling the euro versus the US dollar should think thoroughly before doing so. Personally, I expect a bit of profit taking to begin soon, but I will stand ready to buy the US dollar again once the extreme momentum has abated. The US dollar still has the majority of arguments on its side, and that is not going to change unless the ECB and, more importantly, the Fed will disappoint in December. Next month will be at least as interesting (or should I say, challenging?) as this month turned out to be.