The Daily Edge

‘Hard Brexit’ Fears Turbo-Charge GBP Sellers

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

The Sterling has been sold hard to start the week, losing over 1.5% in its index measure as the scenario of a ‘no-deal’ Brexit is clearly no longer taken for granted. There was always the big assumption that a soft Brexit will eventuate, but with Boris Johnson’s ‘dream team’ flexing their muscle by waing that the working assumption now is a ‘no-deal’ Brexit, the market has been given the green light for the valuation of the Pound to keep catching up to the current political climate. The USD and the EUR, especially the latter, continues to enjoy the approval of the market to sustain the bullish momentum on the back of an ECB that failed to overdeliver last week. However, further gains may be harder to come by as the EUR index tests a key resistance on low volume. In the case of the USD index (equally-weighted vs G8 FX), while gains have slowed down, it’s achieved 7 days of gain in a row even if the quality of the rise is waning. The USD has not out on such a run since early March this year. When it comes to the Oceanic currency block, both the AUD and NZD indexes have reached meaningful technical levels of support, and I do suspect that more efforts will be made to revert the bear trends near term. The Swissy and the Canadian Dollar, even if more so the former, portray an interest technical setting as the Swissy index breaks into new highs. The Yen is still finding a decent amount of demand as falling real yields and steeper curves in US yields incentivizes Japanese investors to hedge out their US exposure by buying JPY in greater sums.

The indices show the performance of a particular currency vs G8 FX. An educational article on how to build your own currency meter can be found in the Global Prime’s Research section.

Brexit Dominates Monday’s Narrative 

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

The Pound is the main talking point in the trading floors as fears continue to mount that a no-deal Brexit may eventuate given the latest “turbo-charged” headlines by UK govement members. The ball got rolling after Michael Gove, man in charge of preparations for a no-deal Brexit outcome said that the govement is now operating under a no-deal Brexit assumption, adding further fuel to the fire by noting that a “no-deal is now a very real prospect”.

Then came the comments by UK foreign secretary, Dominic Raab, stating that the govement is now turbo-charging no-deal Brexit preparations with a daily govement committee looking at no-deal Brexit planning. Note, this is an inner-circle “war cabinet” of Brexiteers supportive of a “no-deal” strategy. Raab added that the EU is being stubbo and a deal with the EU is what the UK govement is after but contention plans must be in place in case it fails. UK Boris Johnson applied further pressure to the GBP, reiterating “we are going to come out on Oct 31, deal or no deal”, adding “if our partners won’t move on the backstop, we have to get ready for no-deal.”

If the EU leaders won’t budge (Juncker was clear last week they won’t) and the Brexit rhetoric continues to ramp up, the Sterling is realistically facing the prospect of further falls to catch up with recent political events. The market is starting to freak out on the realization that a soft Brexit may not happen after all. However, one must be reminded that the maths in the House of Commons have not changed, so it will be a tall order to force a no-deal Brexit, in which case, a general election or another agreed extension on Brexit may ensue. Be reminded, with the UK parliament about to go into recess until Sept, the timing to think of these positive GBP scenarios remains far-fetched, hence the current negative sentiment is likely to be dominant.

The risk that a general election is announced if the standoff by parliament ensues has gone up due to the current govement’s marginal majority. This new election would be what leads to a more credible call to pave the way for a 2nd referendum. If history is any indication, when it comes down to the wire, the E.U. may agree to another extension, with several officials signaling a more lenient stance to grant it, which would allow breathing room for a general election.

According to the Telegraph, the govement is reportedly preparing a big advertisement campaign to get the UK ready for a “no deal’ Brexit. An important point, which takes me back to the mention of the wrong timing to lean on the GBP fence is the fact that headlines are likely to be dominated by Brexiteers in the coming weeks as Parliament is in recess. What this means is that there will be little to no voice being heard from the politicians on the ‘soft Brexit camp’, which may potentially act as a counter-force to the incessant GBP selling we are seeing.

The next key dates on Brexit are as follow. July 25 Sept. 3: U.K. Parliamentary recess, Sept. 29 Oct. 3: U.K. Conservative Party conference, Oct. 17 18: E.U. leaders’ summit, Oct. 31: New Article 50 deadline and expiration of current European Commission term.

Recent Economic Indicators & Events Ahead

The BoJ is the next central bank to update the market on its monetary policy stance, although to be frank, with Wednesday FOMC around the coer, moves are most likely to be contained. The Central Bank will provide updated macro forecasts on growth and inflation targets. 

As a precursor of the foreboding signals to come by the BoJ, the Japanese govement downgraded its economic growth forecast for the current fiscal year, citing weaker exports as global demand wanes. Additionally, the planned sales tax hike in October may also weight further on the economic numbers, the govement stated.

In Europe, we get the French flash Q2 GDP and the German preliminary CPI for July. Since both data points are the first estimates of the series, it may have a significant impact on the EUR, in what’s considered fundamentally key data for the ECB to aid in its policy decision, even if last week’s meeting left little doubt that the Central Bank is readying the market for further easing.

The US has July pending home sales, the core PCE index (Fed’s favorite measure of inflation), personal spending and the Conference Board’s consumer confidence reading.

Source: Forexfactory

A Dive Into The Charts 

The indices show the performance of a particular currency vs G8 FX. An educational article on how to build your own currency meter can be found in the Global Prime’s Research section

With Monday’s low tick volume activity out of the way, the first push to start the week reveal an interesting setting as some of the currencies most recently “turbo-charged” may start to feel the phobia to revert back to the mean from its lofty levels. For instance, the Euro index (equally-weighted vs G8 FX) has risen on a white soldier 3 candle patte with taping volume into a level of critical resistance in the chart. It means that the risk for a correction is on the rise. The USD index, the best performer in the last week as it completes its best winning streak since early March (7 days), has also been its relentless appreciation on lower tick volume dynamics, which again, doesn’t make the currency the strongest contender as low volume = running out of fuel. The Japanese Yen index is struggling at a key supply area, so buy flows are expected to face a major cluster of selling orders not far overhead which should limit Yen strength. The Kiwi index, after being on a slump for the last 5 days, it’s reached a key trendline level, and it’s reacted as one would expect (by rejecting the level and printing a bullish candle) to potentially anticipate the move off the bottom to gather steam for further recovery. The key support level where the Aussie index is bouncing off after it landed there on a low vol tap sequence, strengthens the case for the Oceanic currency complex to find some more love. The Sterling index, as anticipated in yesterday’s note, has found additional selling pressure, even if the magnitude of the selling is something I didn’t see coming. It’s precisely such an outlier overextension that makes the prospects to play short GBP a ‘no go’ short term unless it goes back to more attractive levels. The CAD index, meanwhile, is one to watch closely as it’s gathering further strength even if the sequence of tick volume increase is not encouraging as it tests resistance. Lastly, a currency I’ve been keen to give it my ‘blessing’ since last week is the CHF, as the index did a ‘touch and go’ move after re-visiting its July POC, now at new highs.

The first two charts where I must command your attention, if only for the purposes of updating what’s proven to be another decent call, is the shorts in Oceanic currencies vs the Swissy. AUD/CHF has sold off for 2 days in a row after rejecting the 69c. resistance while the major pin bar rejection in the NZD/CHF has also fared quite well. Both positions should have been by now secured by moving stops to breakeven in the assumption of anyone carrying shorts, especially on the basis that the study of the indexes model was of a potential AUD, NZD recovery.

A pair where further bullish upside momentum appears to be running a high risk of seeing ‘reversal to the mean’ dynamics is the EUR/NZD. Not only the EUR and NZD indexes communicate tentative short and long positions to starting to be built, but the technical events in the EUR/NZD do corroborate that too as the pair has kept its ascent on lower volume into a key resistance area, which also happens to be a round number (1.68). A key level indeed.

Akin to the technical relevance found in the EUR/NZD, the NZD/USD also displays a technical setting congruent with a market that may see the buying interest revitalized judging by the colossal technical level it’s resting at (3rd touch of an ascending trendline). The price has headed into the level on lower volume before a doji candle was printed on Monday. The break of the doji high should validate a short-term play to support NZD longs one could consider.

Another pair where on Monday I fleshed out details as to why we may see buying off the lows to ensue is the EUR/USD, as it headed into critical macro support at 1.11 under a debilitating bearish patte consisting of volume fizzling out. When a key level is attacked on low volume, more often than not, the side in control will struggle to absorb the sitting limit orders there.

Next, out of the next three GBP-centric charts, where I personally see the most potential is to see follow-through selling in the GBP/CAD, as the pair is still far from reaching its 100% projection target. Whereas in the GBP/USD and GBP/CHF, which as a reminder, have been short trades I’ve endorsed to consider since last week (read Friday’s note), both have now hit its respective 100% projection targets, which is an area where market makers, profit-taking tends to lead to potential reversals back to the mean. Granted, the close by NY in the GBP index, with almost nil interest to bid the Pound off the lows, suggests the GBP currency does pass the cut for intraday momentum traders to pile into it for further downside.

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.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • 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