Knocked Down or Knocked Out?


CAVEAT - Ok..so we're there. The US Dollar sell-off has officially reached and now broken critical levels that may warn of a major significant structural shift out of the US Dollar's favor. I am using the EURUSD chart as the proxy for this analysis, with the break above the December 2016 peak triggering a possible inverse head & shoulders formation on the daily chart that projects gains up towards 1.1500. Many had been calling for a Euro test of parity into 2017 and this break makes it very difficult to see that scenario playing out. But there is a caveat to all of this and that caveat is a real establishment above 1.0875 to be convinced this move is legitimate. So with that I'd say we still need to see a close above 1.0875 today for initial confirmation. If we can't see the market close above 1.0875 today, I would introduce the possibility of a false break which will still keep the overall pressure on the downside and still keep alive that possibility for a parity test. 

SAFE HAVEN  - Fundamentally, it would appear the Dollar has accelerated to the downside on the back of a lower degree of confidence in the Trump administration's ability to implement US Dollar supportive policies after the President failed to successfully get through his new healthcare bill. So with tax reform and infrastructure spending looking further away, all we have is an administration that has been talking down the US Dollar and a Federal Reserve that is still trying to maintain an accommodative stance, even while it raises rates. But it's also important to remember that some of this flow comes from fear and uncertainty and risk off reaction in equity markets. And if this is the case, even if that fear and panic originates in the US, the way things work is that the US Dollar is still the currency of choice in periods of turmoil, no matter where it comes from, which should ultimately be a US Dollar supportive driver. So while the US Dollar has just been knocked down, I'm not ready to call a knockout.

The US Dollar has just broken below key levels. Now let's see if it can be sustained. Via @joelkruger

THE PLAY - Strategically, I chose to exercise this view through the Pound on Monday. The GBPUSD rate shot up along with the Euro, with Cable breaking above major resistance at 1.2600. The resulting highly extended intraday move had me jumping on the short side, as to me, the trade looked attractive both technically and fundamentally. Technically, aside from the hourly overextension, we also have a market confined to a broader downtrend while it holds below 1.2775. Fundamentally, while I would agree that Brexit risk has been priced in, I also believe there are going to be some jitters in the UK this week as Article 50 is triggered and as the UK formally initiates the exit process. So on top of the safe haven lure of the US Dollar in risk off settings, I also see the Pound exposed to Brexit risk in the days ahead. The stop-loss on this position has been placed just under cost to eliminate risk after seeing initial follow through. If taken out, I will look to sell again towards 1.2700. 

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