More Virulent Strain Threatens to Dampen Market Cheer for U.S. Pandemic Relief

Conditions rapidly changed since my last Above the 40 post describing the historic territory for overbought conditions. Bad and good news headlines are battling for mindspace where a new more virulent strain of coronavirus threatens to undercut what could have been market cheer from the new pandemic relief in the U.S.

Distress from a New Strain vs New Pandemic Relief

From Europe, a new coronavirus strain in the UK triggered a rapid quarantining of the United Kingdom (UK) from the rest of Europe. European stock markets are dropping, and the U.S. dollar is gaining rapidly against the British pound (EUR/GBP) and the euro (EUR/USD).

The Euro Stoxx 50 Index suddenly gapped down to a 2.1% loss and counting.
The euro is soaring against the British pound (EUR/GBP) even as both currencies drop against the U.S. dollar.

In the U.S., Democrats and Republicans finally came to an agreement on a coronavirus relief bill to send to Congress for approval. The dueling parties also barely averted a government shutdown with a fresh spending bill.

So far, the negative news is understandably winning. This new coronavirus strain is a reminder that the pandemic may yet throw the planet into fresh loops, expense and misery before global populations get to sufficient immunity levels from the vaccinations that launched last week. A drop in the Australian dollar versus the Japanese yen (AUD/JPY) tells me everything I need to know about the likely weak start for pre-Christmas trading in the U.S.

The Australian dollar versus the Japanese yen (AUD/JPY) gapped down and seems ready to reverse the surge from December 10th.

The Trade

Being the contrarian, I consider the rapid drop in the British pound as a short-term buying opportunity. The rush to sell looks like a quick trigger reaction greased by the latest deadlock in Brexit negotiations. Trading in the British pound has been very choppy for almost a month. I am also looking to accumulate fresh short positions against the U.S. dollar across a range of currencies.

The British pound versus the U.S. dollar (GBP/USD) gapped down erased a week of gains and counting.

Be careful out there!

Full disclosure: long GBP/USD, short GBP/JPY, long EUR/USD, long AUD/USD

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