Brexit: Half Equation Done, Miracle Still Needed

The EU and UK official announced the agreement of a new Brexit deal, even if that’s just half the equation, as the ball is now in the courtyard of the UK Parliament, where an extraordinary high-stakes session this Saturday will take place to vote whether or not the new deal can go into law and end this 3-year long conundrum. The Pound has been all over the place with buyers still lurking on dips.

The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

Quick Take

If one thing characterizes the Brexit saga right off the gate more than 3 years ago is the defiance of all odds. What UK PM Boris Johnson has been able to pull off by sealing a new improved deal, even if it may not satisfy all parties, is noteworthy and borderline miraculous. Now, the DUP and SNP not being on board makes the arithmetics a near impossible endeavor for the deal to go through the extraordinary sitting of the UK Parliament this Saturday evening. At this stage, if one is to maintain exposure in GBP over the weekend, do ask yourself, do you believe in a miracle and the ongoing defiance of odds in the form of the deal getting the green light from the UK Parliament? If so, long GBP exposure sure can pay off big bucks, while on the flip side, if one can't conceive such outcome, the GBP may be set to suffer from here on out. Either way, the important point to make is that holding exposure in the GBP over the weekend will carry extraordinary risks of ample gaps at the open of markets in Asia next Monday as interbank dealings will font-run the best quotes to enter before retailers have a chance to transact in the Pound. That's why in most legit brokers that look to safeguard the interest of its clients, including of course Global Prime, GBP FX pairs leverage is likely to be reduced, in our case 1:33 (3% margin requirement) over the weekend in anticipation of increased volatility surrounding the Brexit process. Shifting gears, the free-fall in the US Dollar continues to be a hot thematic too, as the world's reserve currency falls to the lowest in 2 months at an index level. The increased odds of a Fed rate cut before year-end + hopes of Brexit are the main culprits. The Japanese Yen is another unloved currency as risk on picks up. The Euro and the Swissy both found enough demand to stay underpinned in the grand scheme of things, although high-beta currencies (AUD, NZD, CAD) have received the most attention in terms of demand flows, as the market keeps acting as if what's been achieved on Brexit over the last few weeks is meritorious enough to be long risk, independent of the outcome in the UK parliament, which would still most likely guarantee a Brexit deadline extension until next year. The Aussie's extra boost of demand can also be explained due to the better-than-expected jobs report on Thursday, which allows room for the RBA to keep the powder dry in rates short-term.  

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.

EU-UK deal = 1/2 equation: The EU and UK official announced the agreement of a new Brexit deal, even if that’s just half the equation, as the ball is now in the courtyard of the UK Parliament, where an extraordinary high-stakes session this Saturday will take place to vote whether or not the new deal can go into law and end this 3-year long conundrum. The Pound has been all over the place with buyers still lurking on dips.

The deal satisfies only a portion: 
The deal has achieved new concessions on Northern Ireland’s custom relationship with the UK, while allowing the British more control over independent trade deals. On one hand, hard Brexitiers may be satisfied with the progress made, but it may represent a real issue to get the support from those who want a closer trade relationship with the EU.

Do miracles exist in Brexit? 
The fact that the DUP and SNP parties have explicitly and formally opposed some of the Irish backstop conditions under the new deal makes the arithmetics to be approved via the UK Parliament on Saturday, in the words of the Economists, a task that requires a 'miracle' . As a result, the initial rampage of demand into the Sterling saw an almost full reversal even if buyers are still lurking around at the lows, apparently holding the belief that miracles still exist? 

What are the numbers Johnson needs to pass the deal? According to the Economist, Sky media have crunched some numbers, noting that "Johnson needs about 320 votes assuming no one abstains, but there are only 287 voting Conservative MPs. Boris Johnson doesn't have the numbers - yet - to pass his deal in the Commons, but there have been clear signs that some of the resistance is crumbling."

Risk appetite flows steady: The euphoria in the broader market has been relatively well sustained, with stocks and bond yields in the US initially spiking on the encouraging headlines coming out of the EU-UK summit, even if the entirety of the gains were not accepted at the highs as doubts remain. Interestingly, the performance by the Japanese Yen and the Aussie, with the AUD/JPY still defying gravity, is a tell that currency traders do keep high hopes that the deal can come through.

The bellwether of risk in FX (JPY) remains offered: It must be pointed out that the behavior in the AUD/JPY as an accurate barometer of risk, and the overall lingering optimism in the market, appears to be at odds and in rather stark contrast with the present arithmetics in the UK parliament to push this deal through.

UK PM Johnson's persuasive skills to suffice? Will UK PM Johnson be able to convince some of the DUP and SNP MPs in addition to also getting on board the 21 ex Conservative PM expelled from the Party last month? Be mindful, if a deal is rejected, what lies ahead is with almost all certainty an extension of the 31 October Brexit date, followed by a potential general election in order to obtain a stronger mandate.

No delay remains Johnson's hard-line stance: Johnson remains hard-lined with the intention to not ask for a delay of Brexit, in that "it is the new deal or no deal but no delays", as a tweet by BBC political editor, Laura Kuenssberg, notes, citing the UK PM. "source says Johnson will ask leaders to rule out a further delay - he's expected to ask them to make clear it's 'the new deal or no deal but no delays’”

EC's Tusk implies extension to be conceded: According to EC President Tusk, if there is an extension request, it will be considered by members. "We will support an extension of Article 50 if that is needed to prevent a no-deal scenario," European Parliament Vice President Pedro Silva Pereira told Sky News.

Small disappointment in China's Q3 GDP: China Q3 GDP came at 6.0% y/y vs 6.1% expected, although that was counteracted by a major beat in the September industrial production, which came at 5.8% y/y vs 4.9% expected. 

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 formed a broad range structure, where the identification of symmetries is paying off to those traders engaging at the edges where liquidity is the richest and volume has had a tendency to taper off amid the lack of full clarity in the Brexit saga. Buying off the midpoint of the range, which aligns perfectly with the 50% retracement, or at the very extreme, as was the case on Thursday, is where the value resides as the abrupt rejections demonstrate.

The GBP index, while unable to sustain its gains, has not negated its bullish structure on the hourly chart despite the latest selling off the top. Instead, the market continues to find strong buying interest on dips to now transition into a consolidation, which should be seen as the acceptance of high levels (acceptance) in the context of an uptrend. Brace for a wild gap at the open of markets next Monday depending on the Brexit vote in the UK parliament on Saturday.

The USD index continues its free-fall with the price having reached the 100% measured move in the Asian session of Friday, which happens to be nearby a level of daily horizontal support. It is therefore sensible to conclude that rising demand may be observed in close proximity. Any rebound should be seen as an opportunity to sell the buck at higher prices, as the structure of the market has turned bearish across all temporalities from daily down to the hourly.

The CAD index found a major boost in demand at an area expected to contain heavy bids, which based on the reaction north in the Loonie from there, it was indeed the case. The successful rotation of price off the lows by penetrating the prior swing high in the hourly makes any dips in the next 24h an interesting proposition to consider a reinstatement of buy-side business as one would expect buying programs to get back into what’s arguably the strongest fundamental ccy.

The NZD index has been bolstered by a couple of positive headlines ahead of the Chinese GDP, including an upgrade in Fonterra’s milk prices by BNZ, coupled with the strongest setting in the Yuan in over a month. The release of the Chinese data will inject further vol. In terms of the outlook, the structure in the hourly is now more constructive after the takeout of the prior swing highs, even if cluster of offers via pools of high liquidity are eyed nearby as the index tests the origin of a supply area clearly visible on the hourly chart. Note, the structure on the mid-term chart (6h) remains bearish, hence why expecting supply to kick in won’t be surprising.

The AUD index has garnered enough momentum to make a fast transition from the bottom to closing in towards the top end of its broad 1% range. The strong employment report in Australia in the a.m. of Thursday in Asia, alongside the hopes that a Brexit deal is still possible, has been music to the ears of buyers, which have propelled the ccy into the best levels of the week. The broad-based weakness in the US Dollar is another aspect to factor in to explain the AUD rise. Watch the levels marked off in green (hourly) and blue (6h) to find the deepest pools of liquidity.

The JPY index, once again, has stopped on its tracks at the 100% measured move from its latest well-defined bracket. Notice, the sharp decline in Yen valuation has found predictable (temporary) bottoms at the intersection of the 100% measured move in the two initiated mark-down phase, further reinforcing the value that these areas have as rich pools of liquidity where market makers bids, profit-taking from sell accounts and reversal to the mean bbuy programs all come together around the same level to create upward pressure on the price. The market is likely to rebalance upward seeking out liquidity towards a retest of the broken last low (prior 100% measured move), where an impulsive sell-side move origin is found.

The CHF index rebounded very strongly off the lows, finding sufficient demand to validate a shift in the hourly cycle to bullish, with the ascendance in the CHF valuation being blocked by the intersection of the daily baseline (13-d ema) where offers absorbed the draining bids. Dips are now at risk of being bought with more aggressiveness than the amount of offers set to enter based on the shift in cycle and the 6h support line price is heading into, although much of the directional bias in the coming days will be dependable on the Brexit saga.

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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