The greenback took a double hit on Monday sending the dollar’s index below 100 for the first time since December 8 as U.S. treasury yields declined sharply and the safe haven yen was the major beneficiary. The withdrawal from the Trans-Pacific Partnership agreement wasn’t new news to the markets, but it shows that the anti-trade and protectionist agenda campaigned by Donald Trump wasn’t just talk -- the President is serious about delivering on his promises and investors are becoming increasingly concerned about what’s coming next.
Treasury Secretary-designate Steven Mnuchin reiterated comments he made last week on the strong dollar and its negative impact on the economy, which was perceived as a verbal intervention dragging the dollar lower.
Surprisingly, investors didn’t respond positively to Trump’s pledge to cut regulations by 75% or even more, which indicates that markets are currently more concerned about protectionist actions than fiscal expected measures. However, sentiments might change when tax cuts and stimulus measures come into play.
The dollar index has declined 3.6% from January highs so far, and with no tier one economic data on the agenda until Friday, politics will remain the key driver in forex markets. Although the dollar may suffer more losses on the short-run, I still believe that monetary policy will be the main driver in the next couple of months. It’s becoming clear that divergence in monetary policy between the U.S. and the rest of the world will resume in 2017 and 2018, and the U.S. treasury department won’t have the tools to prevent investors from buying the U.S. currency.
Today Sterling will attract most of the trader’s attention. The British pound/U.S. dollar (GBP/USD) currency pair is currently hovering around 2017 highs, just a couple of hours before the announcement of the U.K.’s supreme court decision on whether Prime Minister Theresa May can activate the process for Brexit without parliamentary approval, or if parliament approval is needed before triggering the official start of the two year Brexit negotiations with the European Union.
Sterling has appreciated by more than 400 pips versus the dollar since May delivered her Brexit speech last Tuesday, and we are likely to see another leg higher if the U.K.’s supreme court voted in favor of the Parliament “most likely to be the base scenario.”
However, this wouldn’t mean that Brexit won’t come into action, it’s just going to slow the process and add a few more complexities. Although GBPUSD might still see a spike higher due to more short squeezing, I would consider selling rally then buying the dips.