The Sterling extended its gains as hopes for a Brexit deal ahead of this week’s EU-UK Summit, which begins tomorrow, keep building up. The unwinding of short GBP hedges has been nothing short of mind-boggling, with the latest headlines spurring further momentum as EU, U.K. negotiators are closing in on draft Brexit deal.

Quick Take

The Pound remains the superstar in the Forex arena as talk filters through the market that that the EU and U.K. negotiators are closing in on draft Brexit deal. We saw in the case of the overoptimism int the US-China trade deal, where plenty of details must still be ironed out, that reversals tend to occur as the dust settles and the market takes a step back to analyze the real merits of the headlines. In the case of the Brexit saga, there is still a high bar to meet in the arithmetic side of the equations. An example of the risk for setbacks is the warning from Germany that no matter the outcome of this week, Brexit will still need to be delayed until next year, which goes against the promises of UK PM. The Brexit narrative has so far assisted in the recovery of risk, even if there are still some cracks that must be addressed in the US-China trade deal, despite the disconnect by US President Trump, which is busy talking about Phase Two of the deal when even Phase One is not yet baked in the cake as China demand the removal of Dec 15 tariffs. All in all, brace yourself for wild swings in the market, especially in the Sterling, where the implied vol is at its highest in 12 months. The Yen, as the favorite vehicle to express risk conditions, will also see volatility crank up significantly, while the rest of the currencies pack should see more limited movements. The Oceanic currencies are trading on the back-foot in the early hours of Asia on Wednesday, as negative Chinese headlines related to the HK conflict and RBNZ comments weight. 

Narratives In Financial Markets

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

Brexit positivism dominates: The Sterling extended its gains as hopes for a Brexit deal ahead of this week’s EU-UK Summit, which begins tomorrow, keep building up. The unwinding of short GBP hedges has been nothing short of mind-boggling, with the latest headlines spurring further momentum noting that “EU, U.K. negotiators are closing in on draft Brexit deal.”

Legal text demanded by Barnier: The EU’s chief Brexit negotiator Barnier said a deal is still possible this week but before that becomes a reality, he has requested a legal text of any agreement by midnight UK time in order to decide if a deal is up for consideration during the EU summit. Should the deal be accepted and received the blessing from the EU members, which remains at his point two major assumptions, the ball will then move to the UK parliament courtyard, where an extraordinary assembly is scheduled on Saturday to achieve parliamentary approval. If by October 19th we have no deal, the Benn Act legally forces the UK government to seek a Brexit extension.

Watch speech by UK PM in Parliament: UK PM Boris Johnson is set to address backbenchers at 7.30 pm London time on Wednesday, according to the Daily Telegraph reporter Christopher Hope, which has only fueled the optimism that Johnson is setting the stage to gain the necessary support for a deal. Whether or not Johnson receives support from the DUP is the real question here. Stay glued to the newsflows.

Germany warns extension will still be required: Throwing cold water into the prospects of an immediate departure of the EU, the UK Times notes that Germany has warned that no matter the outcome of this week, Brexit will still need to be delayed until next year. The prime minister has been told that ironing out the details of his complicated Northern Ireland plan would take “some two more months”, which would force UK PM Johnson to request an extension to Article 50 on the basis of an in-principle deal.

US-China trade deal still needs more work: While US President Trump aims to feed into the rather misplaced optimism of a comprehensive US-China trade deal by tweeting about a Phase-two deal including banking, a report by Bloomberg citing sources familiar with the negotiations detailed that China wants US to remove retaliatory tariffs on Dec 15 to reach $50 bn imports of US goods. What this suggests is that further talks to iron out the details may be expected, with the Chinese President Xi unlikely to accept a signature ceremony of the Phase-One deal next month as the conditions stand.

China news outlets' tone not as retaliatory: Global Times' editor-in-chief, a Chinese government mouthpiece, keeps tweeting out a more upbeat stance on the ongoing trade conflict, noting that "Phase-one deal of the China-US trade talks is of great significance for China, the US, and the world.” Yesterday’s tweet also carried a rather positive tone: "Based on what I know, China-US trade talks made breakthrough last week and the two sides have the strong will to reach a final deal. Initial statement of the Chinese side is moderate. This is China's habit. It doesn't mean China's real attitude is not positive."

China urges US to stop pushing forward bill over Hong Kong: China's Foreign Ministry has threatened retaliation against the US as it condemns the House passage of the bill, which clearly shows that trade is just one element in the cold war between the two nations. The news has seen risk aversion kicking in a tad during Asian hours. 

Further deputy-level trade talks ahead: According to Fox Business reporter Edward Lawrence, further US-China deputy level talks will take place this week with the goal fixated on a deal ready to be signed by mid-November. “Deputy Level Chinese trade meetings will happen this week. We expect one more call between the heads of the US & Chinese trade teams. Then possible meetings in mid-November. The Administration pushing to have a final "Phase One" deal on paper by Mid-November."

NZ inflation print better-than-expected in Q3: NZ Q3 CPI stood at 0.7% q/q vs 0.6% exp and 1.5% y/y vs 1.4%. While the logic is that the RBNZ won't be as compelled to ease on higher inflation, Reserve Bank of New Zealand deputy governor Geoff Bascand threw a curve ball to the optimism, noting that NZ remains vulnerable to external shocks, hence lower rate may still be needed to achieve objectives. He added that "sees lower rates being here for some time", with reasonable prospect the cash rate going lower."

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 continues to be trapped between an area of support and resistance in the hourly chart as the currency faces voidness of clear driving factors this week, with all the attention placed in the Brexit proceedings. Ever since the rejection of a daily horizontal resistance (in red), there has been an increase in sell-side flows which has ultimately led to the absorption of a level rich in bids through this week’s lows, leading up to a period of consolidation now.

The GBP index keeps finding further buying interest as hedges are removed and heavy algo-trading activity picks up in response to the lingering optimism that a potential Brexit deal may be achieved this week. The index has now reached a significant level of daily horizontal resistance where supply is expected to increase even if the next directional movement from here will be all about the newsflows and whether or not the positivism can be extended. To the downside, a clear level rich in liquidity where a demand imbalance occurred is key (in green).

The USD index was rejected away from a level of resistance in the 6h chart, which happened to coincide with the 13-day ema (baseline). The price has now returned towards a level of demand off the hourly as depicted by the green line, from where a rebound can be expected. Bearing in mind that the index has recently found a shift in flows due to the test of daily horizontal support, it should add credence to the prospects of buying interest at these pockets of liquidity.

The CAD index found dip buying interest on a retest of the daily baseline (13-d ema), intersecting right around the same level as a level of hourly support (breakout point last bracket). The successful rotation of price off the lows re-validates the hourly level now for further demand imbalances to take place should it be retested. On the way up, there is room for the CAD to appreciate until faced with a supply area, over 0.40% away from the last close.

The NZD index has been rather predictable in the location where a shift in flows would occur. The early week breakout of a key support led to a 100% measured move extension, from where demand picked up for a retest (a 3rd time) of the old support-tuned-resistance, which happened to be a valid level post the NZ CPI-led spike as the last swing achieved a full rotation. The index should stay bracketed between the immediate levels of demand and supply (blue and red).

The AUD index finds itself at a critical support in the 6h chart where demand so far has not emerged, and as I type, a breakout of the area on negative Chinese headlines has transpired. The next level of demand imbalance is expected to come around 0.3% from the breakout point, area where the 100% measured move also comes into play. On the way up, a level of hourly resistance painted in green can be seen where sellers should return on a bounce.

The JPY index is being bought up at the second retest of a daily horizontal support, with any recovery to see supply emerging at the retest of the last swing breakout point. Further up, since the last rotation was a successful one, additional supply imbalance should come into play at the double top, even if one must be aware that a daily demand has now taken control. What this means is that at this point, the likelihood of a protracted buy-side campaign is higher than an extension of the sell-side flows given where we stand in the market structure.

The CHF index managed to successfully rotate to the downside on the hourly chart, which allows for the drawing of an hourly liquidity level where sitting offers in CHF vs G8 FX should be found. Remember, at the time of the test of resistance, is all about trying to match up the expected rotation down/weakness in the CHF with another currency where demand is eyed. Note, the index is very low after a considerable downside extension, which means the risk of a change in behavior with new uplegs to be building from the current location is a real risk.

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