The Daily Edge

The Never Ending Pursuit Of Brexit Goes On…

The purpose of this post is to provide an assessment of the current market conditions.

The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis.

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Ivan Delgado is the Market Insights Commentator at Global Prime with over 10 years experience in financial market analysis.

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Quick Take

Once again, it was all about Brexit and the delayed vote ‘showdown’, which leaves the market with some bitter/sweet taste, as UK PM new Brexit bill was approved in the ‘principles’, but the idea of a soft Brexit by Oct 31st is at this point a hallucination at best as the vote over timetable to enact the necessary legislation was rejected.

It means that the promise to leave the EU by Oct 31st is not realistic, and as a result, the Sterling was sold from its hefty levels, even if there is a glimpse of hope that a short-term 10 day extension may be granted as opposed to an extended new deadline for Jan 2020, in which case, amendments of the withdrawal bill may follow.

If the Brexit extension moves into early next year, then the UK appears to be headed towards a fresh general election. Brexit is the never ending story indeed with lots of unknowns still up in the air. Amid the Brexit-related volatility in the Pound, risk assets traded on the backfoot, leading to renewed demand towards the recently smashed JPY, USD currencies.

The same could not be said about the Swissy, negatively affected by the latest episode in the Brexit saga and hence piggybacking the behavior in the Euro, which still exhibits tepid weakness too.

The high-beta/commodity currencies complex (AUD, NZD, CAD), with the exception of a strong CAD, could not find follow through demand as the risk dynamics took a hit. 

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.

Soft Brexit by Oct 31st unrealistic: The Brexit vote ‘showdown’ finally happened, with the first vote to approve the ‘principles’ of the Brexit deal negotiated by Boris Johnson with the EU getting past by 329 to 299. However, throwing cold water on the idea that we will see a soft Brexit by Oct 31st, the next vote over the timetable to enact the necessary legislation was rejected by a vote of 308 to 322. What this means is that UK PM Johnson can take a theoretical victory lap in that his new negotiated deal was approved, but the promise of leaving the EU by Oct 31st is not realistic as there will be not enough time for the UK to pass all the necessary laws before Oct 31st. 

General election in the UK eyed: UK PM Johnson has threatened that if the timetable is rejected, as it was, and the EU grants an extension, which is intended to, he will withdraw the bill and call for a general election. Even if the UK PM were to go for the venue of an election, Johnson needs 1 – enough votes to get parliament support, which is not a given 2 – a long enough Brexit extension to Jan 2020.

Johnson defiant to leave the EU by deadline: The UK PM continues to defend his hard-line stance by saying preparations for a no-deal Brexit on October 31 remain in place. An ITV reporter said that “the PM will be calling EU leaders tonight making clear our policy remains that we leave on 31/10 and that no delays should be offered.” The UK PM also confirmed that the draft Brexit law will be pulled. “With regret the bill will have to be pulled and we’ll have to go forward to a general election,” he said.

Brexit extension done deal, but for how long? While EC President Tusk said that he will recommend the EU accepts the UK’s request for a Brexit extension, there is still some drama left to be played out as the EU must now decide the length of the Brexit deadline extension, which may vary from 10 days or longer until Jan 2020.

Messier from here as amendments to follow? Should a short 10 day Brexit extension be conceded by the EU, the approved withdrawal agreement still has a shot to be the backbone under which the UK leaves the EU, even if an uncertain period to enact possible bill amendments is highly anticipated, which may include to extend the transition period from December 2020 to December 2022 as it would facilitate more room for the UK to negotiate a new trade deal with the EU. Keeping the UK in a customs union with the EU could be another amendment considered.

Canadian votes, Trudeau wins on minority: The ruling Canadian govement party from PM Trudeau won a second term but it fell short of sufficient votes to form a majority govement. Pressure for further fiscal stimulus is expected to rise as the govement will have to inevitably lean more towards the left. The CAD held quite firm despite the latest hiccups via the non-ideal election result and poor retail sales in Canada.

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 been, and continues to be, characterized by extreme choppiness with buying and selling at the extremes of the daily ATRs paying the most dividends for quite some time. Within this context, endorsing short business in the EUR has been the direction that managed to get the most traction within the broad-based range the index is trapped in. The rejection of the mid-point of this range implies that the market structure is still facing higher risks of having a go towards the bottom of the range, where the previous tests saw strong buy-side interest.  

The GBP index has been facing extraordinary resistance as the multitude of rejections through the most recent top attest. The rollover of price puts at risk the constructive structure that has characterized the Pound since the rally began, as one could argue that the selling that came through after the defeated timetable vote on Brexit represents the first instance that the hourly market structure has been violated as lower lows get printed. Note, in higher time frames, this is a buy only market, so any short-term short play will need to be reconciled with the fact that it will clearly be counter-trend on the mid and higher time frames.

The USD index, for the first time in more than one week, is starting to show tentative technical signs that the order flow, and hence, the market structure is shifting in favor of the bulls, if only from an hourly perspective. This structure needs to mature to have enough merits to be reflected via a positive picture in the higher time frames (H6, Daily). It is nonetheless encouraging to see higher highs and higher lows printed after a double bottom was found. Tuesday’s successful rotation when aggregating the USD buy-side flows is a suggestion that the technical picture has improved for the USD to attract more bids on pullbacks now.

The CAD index found enough buying interest to successfully rotate from its prior low only to breach, even if quite shy, into new hourly trend highs with acceptance found. This price action behavior strengthens the notion that the index remains well anchored by an evolving constructive market structure that should see dip-buying interest firm. On the way up, there appears to be enough of a void to capitalize on longs until the next level of resistance. From a mid-term standpoint (6h chart), the index also shows a positive structure, one that really shaped up after the blockbuster Canadian jobs report from Oct 13 and traders won’t forget.

The NZD index exhibits a clear bullish structure across all timeframes – short (1h), mid (6h), long (daily) – which is supportive of further upward extensions into the most recent highs. The latest successful rotation on Tuesday is yet to meet the 100% measured move, meaning there is unfinished business to be exploited to the upside. Besides, the price action behavior implies the order flow is very conducive, as the last bust of the highs came in high speed and a decent elongation of price as opposed to the corrective nature of the pullback. What this means is, as I’d like to reiterate, that the flow of orders coming through is more aggressive to the upside.

The AUD index is encapsulated in a tight range between a daily resistance line and an hourly support, in other words, we are at a location in the chart where macro offers have met an emerging number of bids, so far leading to a confined balance area. A resolution in either direction must now eventuate to define the next bias. Judging by the number of times the AUD has been rejected from the exact same level in the past, and with this week’s multiple attempts all failing, the risk is growing of a roll over in the price of the AUD index even if there is no backing of the technicals just yet to confirm a violation of the overall bullish structure.

The JPY index, following a protracted period of sell-side pressure, has finally found the necessary buying interest to start building a short-term bullish structure, which is set to face the first hurdle at a level of resistance in the hourly, tested as this report is written. Clearance of this hourly resistance is critical to raise the prospects of further extensions into an old support-tued-resistance on the daily, which should act as a clear reactionary level. Any setbacks to the downside face expected pools of liquidity at an hourly + daily support near the most recent trend low, even if that’s a level that may not come into play near term.

The CHF index has traveled from a level of mid term resistance all the way down to a level of mid-term support, with an anticipated reactionary behavior at the lows coming to fruition. The demand seen at the bottom end of the most recent range comes as a byproduct of the available liquidity that resides in CHF pairs around these lows judging by the strong departure in the CHF from this same level of support the last time, which led to a successful rotation at the time. Should the CHF break the current bearish structure to the upside, there is room for the currency to be refueled with buy-side interest and move away, once again, from this key level of support.

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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