GBP Turbo-Charged As Tories Set For Big Win
The Daily Edge

GBP Turbo-Charged As Tories Set For Big Win

13 Dec 2019
Authored by Ivan Delgado

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 Sterling has been catapulted, with the bulk of the move occurring in the blink of an eye, in response to the UK election exit poll showing that the Conservative party is set to win with a big majority of 368 seats as the votes continue to be counted. The Oceanic currencies also benefited from buy-side flows as the US and China have reached a deal in principle, which now awaits Trump’s signature. The conditions of the Phase One deal, where a roll back of 50% from existing tariffs alongside the suspension of Dec 15th, was definitely music to the ears of a market that remains in a groovy mood to bid risk to the boots. Amid this risk dynamics, the Yen and the Swissy have fallen out of bed, while the US Dollar also makes fresh trend lows as the weak seasonal trend continues to play out in a textbook manner this month. The Canadian Dollar followed the US Dollar in lockstep by showing fragility as well, even if the index is yet to make fresh trend lows. The Euro managed to weather the ECB mini-storm with marked success as the Central Bank upped the CPI forecast a tad and sounded slightly more optimistic on the EZ growth slowdown bottoming out. 

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.

The Pound sees bulk of the rally on positive exit poll: The Sterling has surged over 3 full cents against the USD, with similar range expansions across the board as the UK election exit poll once polling stations were closed shows the Conservative party is set to win in a landslide fashion with 368 seats projected. The first results indicate this projection appears to be quite accurate even if it’s going to take a few hours to clear it all up.

US-China reach deal in principle: According to a Bloomberg report, the US reached a deal in principle with China, with Trump’s signature now the final step, citing people familiar. As the report details, “President Donald Trump signed off on a so-called phase-one trade deal with China, averting the Dec. 15 introduction of a new wave of U.S. tariffs on about $160 billion of consumer goods from the Asian nation, according to people familiar with the matter.”

Roll back of tariffs fuels the ‘risk on’ rally: A report by the WSJ expands on the US conditions proposed to China, noting that US negotiators offered to cut Chinese tariffs by up to 50% on $360B in imports and cancel the planned Dec tariffs. The US would reimpose original tariff level if China fails to carry out pledges. If the deal materializes, the reduction in tariffs by 50% on $360B in imports is a big development, which has understandably fueled the upside in equities and knocked the Yen.

The US is after greater Chinese commitment: The US side has been pushing Beijing to show a much stronger commitment towards the purchase of large quantities of US agricultural and other products, alongside the enactment of new rules that better protect US IP rights and greater access to China’s financial-services sector. According to Reuters, China has agreed to buy USD50bn in agricultural products in 2020, citing people familiar with the matter.

Lagarde provides no fireworks: In her first appearance as ECB President, Lagarde’s opening statement at the press conference outlined some initial signs of stabilization in the growth slowdown, which is a tentative development to keep watching as the German data shows a few green shoots. Lagarde said “risks remain tilted to the downside but have become somewhat less pronounced.” One of the phrases that defines Lagarde’s intention to keep a low-profile is when she said her aims is not to be a hawk or dove but rather an owl. Good way to put it.

ECB a tad more ambitious on inflation: Lagarde added that “incoming data point to continued muted inflation pressures”, hence why “highly accommodative policy still needed”, the policymaker added. Headline inflation prices — largely on oil — are expected to rise in coming months according to the ECB, which is what led the Central Bank to revise slightly to the upside its CPI forecast. “There are some indications of a mild increase in core inflation, in line with previous forecasts,” Lagarde said.

BOC Poloz hint rate cuts not in the horizon: Bank of Canada Goveor Poloz, in a comment that cements the notion that the bar to cut rates has been set higher, downplayed the poor jobs data in Canada from last Friday by noting that “We don’t put a lot of weight on individual data points, especially jobs.”, adding that the actual trend “has been a positive one for the labor market.” When asked about insurance rate cut if jobs fell again, he said “would not look at just employment, would look at other indicators because employment tends to lag.” The remarks are an admission that the outlook is going to have to deteriorate significantly for the BOC to take the plunge and cut rates.

SNB firmly committed to keep negative rate policy in place: The SNB left its policy rate unchanged at -0.75%, with consistency in its language by noting that the Central Bank “is prepared to intervene in markets if needed.” The head of the CB Jordan said that “the Franc remains highly valued”, adding that “negative rates and willingness to intervene should counteract attractiveness of the franc and ease upward pressure on the currency. Jordan also reaffirmed the current policy stance of negative rates by saying that the benefits of NIRP “clearly outweighs” the costs, hence why there are no changes in policy in the horizon.

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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 kept finding interest by buyers to reload long inventory near multi-year lows on the back of the ECB, with the upside momentum further fueled by the UK exit poll, which put Conservatives comfortably in front with a majority advantage. Technically, the EUR has established range-bound conditions by printing equal highs/lows in the last 24h.

The GBP index has surged as the market prices in a majority by the Conservatives that would make the passage of the new Brexit deal by parliament a smoother process. The British Pound has purged its 100% proj target in what constitutes one of the most aggressive one-day rallies in the currency this year. The strategic longs in the GBP had to be played from much lower levels if one is a swing trader. Awaiting for a deep retracement is definitely wise. Don’t chase this market higher unless you know what you are doing as part of a short-term strategy.

The USD index, following its clean breakout of the previous swing low on the back of the FOMC, has seen sell-side accounts pilling in eaest as the index now sets its sight on the next target, set at the double bottom printed back in July this year (~0.6% below). The consistency in the USD depreciation this month is in line with the USD seasonals weakness we tend to see in Dec.

The CAD index keeps pushing into lower territory, partly weighted by the correlation it exhibits with the USD at a time when it is selling-off. Another reason is found on the cleaner alteatives to play long (GBP, NZD, AUD, EUR), which somehow eclipsed demand flows into the CAD. That said, my observation about a lesser commitment by sellers judging by the magnitude of the downside extension of each leg in the index remains true. I am expecting the CAD to potentially become one of the most attractive markets to eye buy-side opportunities by mid-Dec/Jan.

The JPY index is on a one-way traffic path with no end in sight to the sell-side pressure just yet. While the index remains awfully oversold, this type of momentum has the potential to keep on going into the week-end. Being long JPY looks like a very dangerous proposition indeed, while short the currency, unless a scalper, offers a very expensive price to pay. Bottom line, the time to play short JPY is now gone, hence patience is required to reinstate positions short.

The AUD index shows a more sanguine outlook going forward after the currency’s buyers (smart money sponsored move) managed to orchestrate a break of structure. This makes the prospects for further buying opportunities in the Aussie a scenario to seriously account for. The fact that the market came lower early in the week, tapped into liquidity, only to see the mark-up phase in a very explosive fashion, tells me this has the footprint of smart money aiming for a shift in trend. This premise hinges on where the US-China trade talks head to.

The NZD index keeps on delivering for those trend-traders looking to bank on the steadiest FX trend since the beginning of November. The old adage ‘the trend is your friend’ applies here, with the only stance to have is long-sided bias unless you are looking to pair up the NZD against the strongest currencies out there in the last few days (GBP, AUD). As outlined, the bullish outside candle off the daily ended up being a great indication of higher prices as the index achieved what’s referred to as a break of structure of successful rotation on Thursday.

The CHF index has been bashed into fresh multi-month lows after the combination of a dovish SNB, as it vows to keep negative rates for the foreseeable future, alongside the ‘risk on’ dynamics as so far the Goldilocks scenario of US-China trade deal and Breit friendly outcome on a win of Conservatives is playing out as any long risk would have hoped for. The Swissy remains quite weak, but the slow-paced decline at a macro level has other currencies the likes of the USD or JPY exhibit much poorer technicals as reflected in USD/CHF or CHF/JPY.

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