May Trumps Sterling Bears Despite Hard Brexit Call; Dollar Drops

  • ‘Perfect storm’ of pain trades; USD longs, GBP shorts scramble
  • Trump inauguration speech eyed for details to shape USD view

Best Day for British Pound Since 2008

Sterling posted its biggest one-day gain since 2008, after a speech by U.K. Prime Minister Theresa May that outlined a hard Brexit while offering nothing fresh beyond details released over the weekend left sterling bears scrambling to cover short positions.

As sterling rose to near 1.2400 and then beyond, stale shorts against the dollar, the yen and other currency pairs were forced to cover as P&L management overcame sentiment, which still sees the U.K.’s exit from the single market as a longer-term sterling negative and which led to selling that forced the pound briefly under 1.2000 at the start of the week, traders said.

The pound rose as some of the uncertainty surrounding the U.K.’s position dissipated, traders said.

At the same time, the dollar was still reeling after a remark by President-elect Trump that the dollar was too strong led to broad-based liquidation of stale USD longs and a further build-up of USD shorts, even as those remarks appeared to be directed specifically to the exchange rate versus China’s yuan.

Sterling buying and dollar selling represented a “perfect storm” for stale positions set late last year and early this year, one trader in London said, while others said they will look to Trump’s inauguration speech set for Jan. 20 for further details that may shape the dollar’s outlook over coming months.

The USD is lower vs all of its G-10 peers, down ~1.25% as measured by the Bloomberg dollar index, close to its low of the day.

  • GBP/USD is +3% at ~1.2406, near a recent fresh high of 1.2415 in the session; GBP tested technical resistance at its 55-DMA 1.2413
  • EUR/USD trading ~1.0708 and has held close to that level for much of the session, near the session high 1.0719 seen as offers in the 1.0720/30 zone capped gains; further offers are in place ~1.0800 where real-money players will look to buy USD, traders in Europe and the U.K. said
  • EUR gains were slowed amid selling of EUR/GBP as traders scrambled to cover sterling shorts in that cross
  • USD/JPY dropped to a fresh low 112.68 in choppy trading as GBP/JPY fell briefly from its session high, the USD drop cushioned by residual bids that were layered from 112.90 down to 112.60, according to traders in Europe
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