GBP Hit By Brexit Maze As FX Drivers Expand

As painful as it is to keep writing about the turns and twists in UK politics, it is next level 'misery' to see one more day go by and we are none the wiser. Today's report explains you the latest developments driving currencies, with the Pound hit as UK PM Johnson aims to go all in with a general election. You will also find out why the Oceanic currencies are suffering again among other gems.

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics including fundamentals and technicals in order to determine daily biases and assist one’s trading decisions.

Let’s get started…

Quick Take

With the UK PM Johnson intending to go all in for a general election, the Pound found consistent selling. There is still some major unknowns keeping the market guessing how it will all play out in the Brexit conundrum. The base case is that a 3-month extension to the Brexit deadline will be granted by Monday the latest, while another piece of the puzzle for the election to come to fruition is the need of Labour support as Johnson needs a 2/3 majority. Once no-deal is ruled out and if the extension allows, only then Labour may give the green light, although with the party behind in the polls, it's a tough one from a purely political standpoint. Johnson has Dec 12th in mind as election day. Amid this dicey scenario, and with data out of EU PMIs not helping, alongside a retaliatory speech by US VP Pence on China, risk appetite took a hit, emboldening the allure towards the likes of the Japanese Yen or the US Dollar. However, the currency that stood out among the G8 FX complex was the Canadian Dollar. On the flip side, the Oceanic currencies traded on the back-foot as yesterday's speech by US VP Pence is a reminder of the ongoing frictions in the US-China relationship, seen as a barometer of how close they may be to a comprehensive and meaningful trade deal down the road. The reaction in the AUD, NZD tells us not any closer. The behavior in the EUR was clearly dominated by sellers keeping the upper hand on ephemeral episodes of strength, with neither an uneventful ECB or EU PMIs acting as a source of encouragement at all. Lastly, the Swiss Franc topped it off with a rather mix-bag performance, pressured by the Brexit jitters and EU PMIs but sufficient demand was found as risk off picked up. 

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

UK PM aims to go all-in on general election: UK PM Johnson continues to be deeply immersed in a political quandary as he does intend to go all in by calling a general election, one that Labour appears to support should it be given the assurance that the EU will grant a 3-month Brexit extension till the end of Jan 2020.

But Johnson needs Labour support: Shadow leader of the House Valerie Vaz said they would back it up “once no-deal is ruled out and if the extension allows”. Note, the PM needs 2/3 majority to get an election motion vote ratified, but with Labour behind in the polls, there is no certainty the party will give its consent.

Johnson has Dec 12th in mind as election day: If a UK general election takes place, the dated proposed would be December 12th. The last stance by PM Johnson is to offer more time to debate Withdrawal Agreement Bill (WAB) subject to MPs supporting an election on the stipulated date of December 12th.

EU to delay the 'Brexit extension' decision? To add to the uncertainty, the EU is reportedly said not to make a formal decision until Monday. According to Katya Edler from the BBC, according to a EU diplomat, “considering Boris Johnson’s call to ger Parliament on board for Dec 12 election, EU might wait to announce its decision on the length of the new extension till Monday. This, while MPs in gov and opposition wait to see what the EU decides.” An utter circus at this stage one would think.

ECB stands pat on policy: In what was Draghi’s swansong, the ECB decided to leave policy unchanged, even if Draghi’s departure comments were rather downbeat on the outlook for the economy. Draghi highlighted that ample degree of monetary policy is still necessary, reiterating that governments with fiscal space must do more. Draghi also warned that headline inflation is not expected to pick up anytime soon. As a reminder, Lagarde will be chairing the next meeting as the new President of the ECB.

Draghi leaves with controversy around his last QE call: According to the WSJ, the latest ECB QE announced in Sept caught a number of members by surprise. The WSJ notes: “According to three people familiar with the situation, Mr. Draghi presented his rate-setting committee with the package only hours before a decision had to be made. "There was no outreach" ahead of that day, said one official....In a rare twist, the ECB's own staff monetary policy committee opposed the move, warning it may not be effective given the huge quantity of debt the ECB has already bought.”

Data in Europe remains worryingly weak: The EU and German PMIs came on the weak side, raising even further fears that the economic downturn in the European block may get worse before a meaningful turnaround. The German IFO is the highlight in today’s European session, with no improvements in sight just yet.

US data a mixed-bag: The US PMI came slightly better-than-expected, which raises the prospects of a pickup in the widely followed ISM index next month. Meanwhile, the US core durable goods orders came soft, with the common denominator dragging down the index being the lack of business investment as the trade war extends.

US VP Pence flexes muscle on China: In a much-awaited speech, US Vice President Pence has accused China of curtailing “rights and liberties”, adding that it has become a nation “even more aggressive and destabilising”, raising some clear concerns about the handling of the Hong Kong crisis and the treatment of Muslim Uighurs in the Xinjiang region. The speech, seen as a barometer of the appetite by the US to really go all in on a trade deal, leaves the impression that Trump is not softening up. In fact, Pence reinforced the notion of a “fundamental restructuring” in the US-China relationship.

First cracks in US-China trade deal phase I? Besides, in what should be interpreted as a negative development, Bloomberg reports that China is only willing to buy $20 billion of US agricultural products in year one, and that in the second year, those purchases could go up to $40-$50 billion if tariffs are removed. What this means is that the original commitment after the Washington meeting is already showing clear cracks.

Mild risk-off the end result: The mounting evidence that Germany is headed into a technical recession, the turns and twists in the Brexit saga with uncertainty reigning, alongside the downbeat tone in Pence’s speech about China, have all contributed to depress the risk appetite, with the rise in the JPY, CHF, USD a testament of the poor mood.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices Charts

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.

The EUR index has narrowed its consolidation level towards the downside, with the benefits of looking for the formation of a projected top based on the 100% measured move, where market makers are in most cases active, paying great dividends for those identifying these levels. The return back down into the range makes the outlook for the EUR far from clear, but one thing is clear, traders are getting paid to engage in sell-side action on strength in larger proportions.

The GBP index has extended its range another day, with buyers still showing up at the bottom-end to keep the index within familiar levels. While the recent pressure has been to the downside, the GBP flows suggest there is no trend at play but rather market makers are dominating the proceedings by engaging at the edges as the Brexit uncertainty remains. Once the range is broken, the projected target areas can be found in magenta.

The USD index has found a new leg up, which again, has been met with an opposing supply imbalance at the 100% measured move from its last breakout point. The acceptance above the prior high, coupled with the impulsive leg up (strong buy-side order flow) suggests that any dips continue to potentially provide buy-side opportunities at value areas (line of supports). Should a further extension eventuate, watch the confluent area overhead (area of supply + former daily support-turned-resistance + baseline 13d ema) to act as the next cap for the USD.

The CAD index, not only exhibits a very elongated move that is due for a pullback, but the index has reached a very important level of daily resistance where a major impulsive selloff originated from. One must be on high-alert for the CAD to potentially give back some of its gains around this location, as order flow history into the CAD suggests this should be a reactionary level where unfilled offers will come into play creating sell-side pressure in the currency. Should buyers continue to press higher, there is between 0.25% and 0.40% of upside available until the next logical targets where supply should kick in to overpower the bullish structure temporarily.

The NZD index outlook has deteriorated following the carving of a double top with a subsequent breakout of structure by price finding equilibrium below the prior swing low. If more sell-side pressure feeds through, the next logical area for the NZD to land to would the the 100% measured move where market maker bids and profit taking. If there is a recovery from Thursday’s close, the NZD has room until faced with the next resistance area, although note that selling on strength start being more justified as the bearish legs are expanding in magnitude.

The AUD index has formed a second leg down, this time larger in magnitude than its first one, what this implies is that the market structure off the hourly is such that we should be expecting with a fair degree of confidence increasing sell-side pressure on the way up for a resumption of the bearish trend in what would potentially constitute a third leg in the index. There is an interesting level of confluence to the topside should the prior swing high be retested as that’s the same location where the baseline (13d ema) intersects at as well.

The JPY index can be characterized as a market that found sufficient liquidity at the lows to have transitioned into a distribution period, with no clear bias as the market makers dominate the proceedings at the edges. There needs to be a move made by either side to clearly breakout the range in order to define the next direction, even if in the grand scheme of things, one must respect the bearish macro context as the price remains significantly below the baseline.

The CHF index traded in a compressed range with the bearish structure still intact as buyers failed multiple times to make much leeway during Thursday. If the support below gets retested after the poor showing by buyers on the last pushes up, risk exist that market makers’ bids get finally absorbed, in which case, it would set the stage for the next macro target with a move that is anticipated to be about 0.65% based on the 100% measured move. On the contrary, buyers must retake the level of hourly resistance above to violate the bearish structure.

Important Footnotes

  • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
  • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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