UK PM's Hard Line On Brexit Keeps GBP Down

The Pound continues to be the main mover as the selling pressure doesn't abate on the back of renewed fears of a hard Brexit. The Oceanic currencies keep thriving as fundamentals pick up and the macro risk removal of US-China trade tensions (for now), clears the path for the smart money to sponsor long plays. Want to find out the outlook for the rest of G8 FX? Keep reading ...

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 one-way bearish traffic in the Sterling remains the norm as the market discounts the increased odds of a hard-Brexit as UK PM Johnson prepares the market for a change in legislation that will prevent any extension of the Brexit transition period beyond Dec 31, 2020. The uneventful BoE did little to appease the GBP sell-side action. The Oceanic currencies, spurred by postive fundamentals (upbeat Aus jobs + NZ Q3 GDP) keep traveling northbound, while the Swissy remains a beneficiary of seasonal tendencies. The Euro, which has been characterized by a directionless bias at an index level this December, continues to show little signs of life (read volatility). The Canadian Dollar, after the commanding bullish run this week, finally saw a slight pullback that does little to damage the improving bullish outlook in what's setting up to be a candidate to start 2020 the same way it performed in the whole of 2019, that is, with positive order flow, with the technicals and fundamentals converging. The US Dollar has attracted very tepid ebbs and flows in a clear sign that trading activity in the world's reserve currency is starting to taper off for the year. Remember, January tends to be the best performing month, which if it materializes, we are looking at a fairly cheap valuation in the Greenback heading into next month. Lastly, the Yen remains at depressed levels and if my base case turns out to play out, I am expecting the currency to resume it bearish tendencies during the month of January as risk sentiment, fundamentals and technicals stand. 

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 under the cosh: The Pound continues to be raided by sellers in what’s been a one-way traffic as the market psyche shifted very abruptly from pre-election optimism that a hard brexit could be averted to these fears resurfacing as UK PM Johnson reminded the market once again that comes the end of 2020, he will rule out via legislation any extension to the Brexit transition period. The market is understandably unsettled on the basis that the EU sees a ‘comprehensive’ deal as a highly unlikely outcome given how much there is to negotiate in the limited scope of time available. Johnson said that “we will avoid the trap of further dither and delay by ruling out any extension."

Uk retail sales not helping GBP sentiment: The dismal UK November retail sales, which came at -0.6% vs +0.2% m/m expected, with the sub-components also very poor, added extra pressure to the Pound. However, one must be reminded that the data does not account for the retail sales activity of Black Friday. The market will need to wait for the next UK retail sales activity in Q4 as the release that will more accurately represent the true state of affairs in the consumer purchasing power.

BoE as uneventful as it gets: The BOE left its bank rate unchanged at 0.75%, with a vote breakdown of 7-2 (unchanged).The votes by Haskel and Saunders to cut the bank rate by 25 bps was as expected. The BOE stated that they can't tell yet how much policy uncertainties have declined since election. It was an exercise aimed at controlling tamed expectations by sounding as ambiguous as possible in the policy outlook to leave the market guessing, hence, reinforcing the notion that they remain in ‘wait-and-see’ mode. Proof of that is that the statement made a case for both tightening or loosening policy. On one hand, the BoE stated “if global growth fails to stabilise or Brexit uncertainties remain entrenched, monetary policy may need to reinforce expected UK recovery”, which is dovish. On the other hand, the BoE detailed that “if risks do not materialise and economy recovers broadly as expected, some modest tightening of policy may be needed.”

Trump impeachment a non-event: Even though there have been plenty of click-bait activity by publishers doing their best to make it sound a dramatic event, even my younger brother (no clue on markets) sent me a text message underscoring how big of a deal this was, Trump impeachment story is largely irrelevant. Yes, the House did pass legislation to ousting the President, but it’s highly unlikely that this materialized as Republicans hold a majority in the Senate and 2/3 votes are needed for the impeachment charges to succeed. Nonetheless, as an anecdote, the US President Trump was charged on two accounts. First, it was impeached for abuse of power, and secondly, it was impeached for obstructing Congress. Now you understand why markets didn’t budge.

BoJ sticks to easing script: The BOJ left monetary policy unchanged as universally expected, with the rhetoric sounding a little bit more downbeat. The Central Bank did maintain its forward guidance on interest rates, adding that the projections are for rates to remain at current or lower levels for as long as needed to guard against risk of lost momentum in hitting price goal. In the press conference, BOJ Governor Kuroda reiterated that it is appropriate to keep policy stance tilted towards easing, noting that the downside risks are significant for the Japanese economy. The central message Kuroda has been sticking with this year is to keep the market in check by always emphasizing that the BoJ is ready to act with more unorthodox easing tools if necessary. Nothing new.

US-China set to sign deal in January: US treasury secretary Mnuchin reassured the market that the US/China trade pack will be signed in January, in headlines carried by CNBC. Mnuchin said the trade pact is on paper and translated and not open to renegotiation. The pact is currently going through a technical legal scrub. Mnuchin said “the US priority on trade with China right now is to implement phase 1 deal but prepared to work hard on phase 2”, adding that “for the 1st time we have binding enforcement. If disputes are not resolved the Pres. has the authorization to put on tariffs.” Meanwhile, the Chinese commerce ministry stated that the Phase One trade deal content will be disclosed after the deal is signed, adding that the US, China trade teams are in close communications.

Sweden hikes interest rates: The Riksbank (Sweedish Central Bank) hiked rates to 0% as expected in what marks the end of a five year experiment with negative rates. As the research team at NAB notes, “while it is tempting to take this as a pointer for central banks in 2020, it is worth noting that the Riksbank’s forecast for the policy rate is to be on hold through 2020 and 2021, while unemployment is forecast to edge higher.” At the press conference, the Central Bank outlined that playing a key role in the tightening call was the risks of keeping negative rates too low for too long. The Riksbank was worried that negative rates were damaging the economy by boosting asset prices and debt and increasing the risk of a financial crisis.

Norway stands pat, further hikes not ruled out: The Norgesbank also met on Thursday, but in this case, it kept rates unchanged at 1.50%. Judging by the appreciation in the NOK, the market appears to have perceived the message as mildly hawkish, which takes the chances of an additional rate hike during 2020 at around 40% at this stage. The Norgesbank, however, stated that “since the rate path is closer to 1.50% than 1.75%, the path can be interpreted to mean that there is a greater probability of the policy rate path remaining at 1.50% than being raised to 1.75% in the coming period”.

Aussie jobs beats expectation by a large margin: The Australian jobs data came better-than-expected after the unemployment rate ticked lower to 5.2% vs. 5.3% expected and the employment Change jumped to +39.9K, way above the +15.0K expected, even if the prior reading in Oct was revised to -24.8K. The breakdown of full time vs part time employment comprised a change of +4.2K in the former and +35.7K in the latter. The participation rate was steady at 66.0% as expected.

The green shoots in the NZ economy continue: The New Zealand Q3 GDP came improved at 0.7% q/q vs 0.5% expected, which led to a rise in the New Zealand Dollar as a result. Again, this positive deviation plays into the view that the NZ economy is turning a corner and therefore should keep the RBNZ powder dry (no rate cuts).

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

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The EUR index trades with no visible changes to its messy technical outlook in what looks set to be the conditions that will dominate through the holiday period. The single currency, technically speaking, remains in no man’s land, in what I dub ad an inconclusive bias, with market makers at both extremes of the distribution phase dominating the proceedings. I’d be expecting these conditions to extend until at least the second week of January as vol dries up.

The GBP index finds no respite to the one-way downside traffic and the close near the low of the day by NY close is worrisome for buyers as it depicts an alarming lack of counterparties willing to put an end to this trend. If we pay close attention to the market structure on the daily, the prior low from Dec 12 has now been taken out, suggesting that the shift in order flow is significant enough to start thinking that a new daily cycle low has truly begun. This bearish outlook will need to be reassessed when market return back to life the 2nd week of Jan.

The USD index continues to be in an unambiguous downtrend, but with the holiday season around the corner, I can easily see as a result a distribution period ensuing with no sufficient flows to set a discernible directional bias over the next 2 weeks. Be aware, the supply imbalance faced overhead, which has already allowed a bit of a pullback in this week’s USD momentum. Be reminded, in January, the USD tends to put on the best performance of the year, if historical data is any indication, hence there are risk of buying pressure picking up in January, even if for now there is no agreement (far from it) with the technical outlook.

The CAD index is in the midst of transitioning into higher levels judging by the market structure, one that has been validated this week through the break of the prior swing high. As reiterated, the CAD market has appreciated too fast too quick, and with trading activity about to peter out, I’d definitely let the market go through a retracement to provide us more value to be a buyer at cheaper price levels. The case for a protracted bullish bias into January is my base case, even if one must be aware that seasonals in the CAD are not ideal into next month, although technicals and fundamentals are definitely the two positive factors that anchor the currency.

The JPY index looks set to be the most vulnerable currency heading into January as technicals (bearish), risk sentiment (risk appetite dominating) and seasonals (Jan bad month for JPY) are converging. What this means is that the sell-side pressure, upon a temporary respite, may resume. Notice, the index reached its 100% measured move last Friday, with the closing daily candles ever since respecting this area where the clusters of bids outweigh JPY sellers for now. Selling the currency on rallies remains a sensible strategy against the full complex of G8 FX.

The AUD index, following the break of structure last week, has attracted bids on this week’s pullback, assisted by the beat in the Australian job figures, a risk event that as I stated in yesterday’s report, cements the bullish directional bias. The fundamental background, with the US-China trade risk out of the way for a while, also helps to support the buy-side case heading into the next month. Also be reminded, Jan is a neutral month in seasonal for the currency.

The NZD index, on the back of a bullish outside day on Wed, found further follow through to validate new cycle highs, which underscores the strength on the uptrend. The buy on dips mentality is by far the preferred view going forward even if one must be well aware of the risks that come with the expected decrease in volatility over the next few weeks for the market to lack the sufficient momentum to keep extending in the manner it has until now. In other words, the trading environment may turn much choppier until the 2nd week of January.

The CHF index has broken its structure to now shift the focus to the bullish side. What this entails is that any pullback should attract more buying interest as per the recent ebbs and flows. However, as mentioned in yesterday’s report, be aware that while Dec is a good seasonal month for the CHF, the opposite is true come Jan. Besides, the risk sentiment remains ‘true risk off’, not to mention the CHF is an ideal pick to fund carry trades. What this means is that Jan may see the uptrend struggle and offers some great short-side opportunities. This view is still too premature for one to be married to it but it’s something I will monitor closely.

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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