UK PM Throws Cold Water To Soft Brexit Path

The Pound has given back all the UK election day-induced gains after the UK Prime Minister Boris Johnson threw cold water to markets by announcing a planned change of law as part of the Brexit deal bill to prevent an extension in the Brexit transition period beyond December 2020. What does this mean for the GBP? What currencies are best positioned to do well under the current conditions? Find out in today's report as I provide an update in the latest fundamental and technicals in the G8 space.

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 weekly show. 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 conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.

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Quick Take

The waxing and waning in the valuation of the Sterling, with an average daily range of well over 1% since the UK election outcome, portrays how unpredictable and treacherous the environment to trade the Pound remains now that the market is looking past the election and re-calibrates the drivers based on what lies ahead. The latest selling round, courtesy of Bojo planning to set a hard deadline for Brexit to Dec 30, 2020, has resulted in the evaporation of all UK exit poll-led gains in the Pound, and represents a harsh reminder that it is far from certain that a smooth transition out of the Eurozone will ensue. The bottom line is that a wild ride trading the GBP awaits in 2020. On the flip side, the Euro and the Swiss Franc, have benefited the most from the lackluster performance in the Sterling, as portfolios appear to have reshuffled swiftly away from an overexposure in the Sterling and diversify into the other European-based currencies. The Canadian Dollar, in line with the bullish projections established since last week in the technical analysis section of this report, continues to attract increasing demand flows as the bearish cycle in the index decays. The dovish stance retained by the RBA minutes  didn't help the Australian Dollar, which continues to pullback even if the outlook is fairly constructive judging by the recent break of structure in the index. The Kiwi, meanwhile, had a similar weak performance akin to the fragility seen in the Aussie, even if the currency also maintains a bullish outlook going forward. Last but not least, two of the currencies most punished in December, that is, the USD and JPY, managed to recoup some of its ample losses despite the respective indices still display clear bear trends.

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.

GBP worst performer as UK PM flexes his muscle: The Pound has given back all the UK election-induced gains after the UK Prime Minister Boris Johnson sent a stark reminder to markets by announcing a planned change of law as part of a Brexit deal to prevent an extension in the Brexit transition period beyond December 2020.

Market telegraphs risk of hard Brexit back: The market got spooked at the possibility that with less time and a lot more to negotiate, the UK may end up leaving the EU without a trade deal, resulting in a hard Brexit. As a reminder, EU's chief Brexit negotiator Michel Barnier said last week that hashing out a "comprehensive" free-trade deal by the end of December 2020 would be a near impossible task.

Dynamics to trade GBP in 2020 to remain volatile: The strategic move by UK PM Johnson to amend the Withdrawal Agreement Bill by ruling out any possibility for an extension of an extra 1 or 2 years, which the market expected to still be a possibility in case no agreement could be reached by the Dec 2020 deadline, suggests the GBP trading dynamics in 2020 looks set to be as volatile, if not more, than in 2019.

Bojo can always change his mind if he wishes: It’s important to note that if BoJo (Boris Johnson) has a change of heart next year, he could still revise the law once again by introducing a new bill that will enable an extension of the negotiations beyond the deadline of Dec 2020 if he finds it appropriate. What has changed is that Bojo has now a strong mandate after the landslide win in the UK election, and that allows him to flex his muscle to force the EU to come to the table and put pressure for an agreement in 2020. Bojo is most definitely going to be looking to capitalize on this stronger negotiating position.

RBA minutes retains tentative dovish stance: The outcome of the RBA Dec minutes was more dovish than expected after the Central Bank stated that they will reassess conditions, which reinforces the notion that the RBA is monitoring closely the evolving state of the economy before potentially taking the plunge again by further cutting rates if they so require. This resulted in a lower Aussie. The key passage read: “Members agreed that it would be important to reassess the economic outlook in February 2020, when the Bank would prepare updated forecasts. As part of their deliberations, members noted that the Board had the ability to provide further stimulus to the economy, if required.”

RBA’s Harper cites rush to cut as unwanted: RBA board member Harper told the WSJ that a pause in the rate-cutting cycle was needed by stating “rushing to cut rates further could have risked overstimulating the economy”. Harper added that “in this environment, you don't want to jump the gun”, further reinforcing the view that the actions taken by the RBA to lower rates in 2019 “is globally induced.”

NZ fundamentals keep improving: The NZD also traded weaker despite the ANZ NZ business outlook survey continues to show an improving trajectory. The business Confidence stood at -13.2 vs -26.4 last, while the activity outlook printed 17.2 vs 12.9 last. The ANZ summary of the key points detailed that “the lifts in the manufacturing sector was particularly strong. Services and manufacturing are the most upbeat sectors; construction remains the least optimistic but is improving rapidly.” The green shoots observed in the New Zealand economy as of late take some of the pressure from the RBNZ to cut rates further. On the flip side, the latest GDT dairy auction was non-supportive for the NZD, after a larger fall than expected to the tune of 5%.

US government shutdown to be averted: The US House passed a number of funding bills that would avert a government shutdown. The spending bill is worth $1.4 trillion, with the Senate to take the baton and eventually vote.

US housing thriving: In the US, the news that housing starts and building permits came better than expected adds to the optimism built, and further cemented by the improvement in the private NAHB index to the highest level since 1999 yesterday, which supports the view of a thriving housing market.

German IFO, CPIs, Lagarde speech eyed: The German IFO survey is a key market mover for the EUR today. Following the softer than expected German Manufacturing PMI on Monday, today’s print takes a whole new dimension as another disappointment, amid a rising Euro, may offer some excellent opportunities to consider strategic shorts on the basis that the German slowdown is still facing downside risks. Additionally, in terms of economic data, inflation readings in the UK and Canada will command the attention of the market, alongside the latest Brexit headlines. There is also a speech by ECB Lagarde in the European morning to be monitored closely.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX 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.

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The EUR index has gone through a major buying spree in the last 48h of price action, taking the index to its highest level in weeks. The move reaffirms the notion that the outlook for the single currency, technically speaking, has improved as the market took out a significant prior high. Note, when the Euro trades this high, in the majority of cases, follow up demand will be limited on the basis of strong sitting cluster of offers as the market finds it opportunistic to add EUR short inventory given the attractiveness of the swap it carries. The move from the low to the high has been too fast too quick and a retracement is to be expected before a trend resumption.

The GBP index has experienced the type of impulsive gyration off the top that could cause a shift in trend even if it’s still way too premature. What’s clear is that this is not the type of slow and corrective pullback one would expect to gain confidence in engaging in buys in expectations of a resumption of the uptrend. The impulsive nature of Tuesday’s down candle, alongside the close near the low of the day by NY, suggests there has been a change of heart in the GBP valuation. The currency trades low enough for buy side opportunities to definitely be available but I wouldn’t be as inclined to endorse an outright and perma bull case after what I saw the last 24h.

The USD index still shows a downward trajectory as the most likely course of action as part of a bearish cycle that is yet to be finalized. Therefore, the upward correction in the last 24h is still perceived as an opportunity to engage in a short bias if able to pair the currency (USD) against the strongest contenders out there, with candidates abounding (CAD, EUR, CHF, AUD, NZD). The ultimate target I am fixated with in the index would be the double bottom from July. It may or may not happen, but to me that’s a clear target that suggest unfinished business to the downside.

The CAD index continues to prove the premise of a meaningful bottom found as a base scenario that is playing out as initially envisioned. Remember, the bullish case for a pick up in the CAD demand flows was predicated on the fact that the bearish cycle had reached a late phase in its maturity as portrayed by the decreasing magnitude of each down leg (-1.76%, -1.46%, -1.15%). The sizeable bullish print printed on Dec 13 was another major clue that the market ha snow transitioned into a buy the dip mentality. More upside is expected as I believe this could be the onset of a much larger run to the upside. Be mindful of the Christmas period though (low vol).

The JPY index shows a clear bearish trend still playing out and nothing has really changed this outlook in the last 24h of price action. As mentioned on Monday, I wouldn’t be expecting a reversal of the bias around these levels, which makes me think that selling the currency on rallies is a sensible strategy against the full complex of G8 FX. The higher the market goes, the greater the opportunity to sell on strength in my opinion. Longs JPY remains a dangerous proposition as the macro environment continues to improve after the US and China have seemingly managed to delay a further trade war escalation. The record highs in US equities is another major stone in JPY longs’ shoes that reinforces the bearish bias.

The AUD index, following the break of structure last week, is back trading in what I perceive to be a hot area to seek out long opportunities. The pattern in the daily chart is what I refer to as a potential ‘RHS’ (Right Hand Shoulder) formation, which may or may not work, but it offers a phenomenal risk reward to look for longs on the basis that the prior swing low will hold. I still think this is a market where buy-side has dried up but remains absent of sell-side smart money involvement, with the tapering in volume from the peak supporting this view. Therefore, I anticipate the correction to be a genuine opportunity to actively look for AUD longs.

The NZD index is another currency that remains on a solid uptrend as the higher highs and higher lows clearly depict. The setback on Tuesday is nothing more than a small blip in what’s still a market with a buy on dips mentality based on the market structure. The Kiwi continues to offer one of the cleanest trends and I wouldn’t, at this point, consider a counter-trend bias as the technical picture has not yet given indications of reaching its full maturity phase, unlike what we saw in the CAD index where the decreasing magnitude in the legs was more revealing.

The CHF index has displayed a very interesting pattern that could have certainly been exploited by those with an avid approach to adapt to it. What I mean is that every time a new low was made, the market failed to extend lower, to instead see consistent strong buy-side pressure. The failure to elongate the price structure beyond each bearish breaking point is a pattern that has provided phenomenal results for those engaging at these cheap prices. The breakout of structure by taking out the prior double top has improved the overall outlook too.

Important Footnotes

  • 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
  • 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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