The next chapter in the Brexit saga hinges on the decision of the EU as it ponders the length of the new deadline. If you want to find out what's next in this utter mess, why the Sterling continues this strong, how other currencies are performing amid the buoyant risk appetite, or the reason that the USD may have further upside, read on...

Quick Take

The market is in the midst of transitioning towards the next chapter in the Brexit saga. We must await now on whether or not the EU grants a 3-month extension to Jan 31st 2020 as the next deadline, a decision most likely to be taken by Friday as a period of consultation with EU member states is currently underway. The base case, despite the idea of another long delay doesn't sit well with France, is for a general election in the UK to be the next sensible step. Overall, judging by the stubbornness in the Sterling, the market still exhibits a behavior as if the odds of an accidental no-deal Brexit are largely eliminated. The Kiwi is the only currency challenging the high-altitude the Pound keeps flying at in the last 24h, while the Canadian Dollar also shows decent demand flows as longs price in Justin Trudeau’s Liberal party obtaining a larger share of the support than previously thought, alongside the backing of Oil prices after an unexpected 1.7mn barrels draw on crude inventory by the EA. The Euro and the Swiss Franc have traded in very confined ranges, although the prevailing market rhythm has been dominated by sellers, especially on the latter as risk appetite is retained. It is precisely the minor improvement in risk dynamics once again that has sent both the Yen and the US Dollar back down, with the outlook for the world's reserve currency still constructive near term.

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Narratives In Financial Markets

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

Length of Brexit extension awaited: The next chapter in the Brexit saga hinges on the decision of the EU as it ponders the length of the new deadline for the UK to officially leave the European block. According to Bloomberg, it probably won't make a decision on Brexit extension until Friday.

Resistance by France & minority: France and “a significant minority” of others argue for a short-term extension, in which case the current WAB with some amendment may still see the light (unlikely), while EC President Tusk, Ireland, Germany plus most other EU countries agree for Jan 31st 2020 as the next deadline.

France has had enough... According to the Telegraph, “the French President's hardline stance, designed to exert maximum pressure on MPs in London to back the deal, has horrified diplomats in Brussels, who fear the short delay raises the risk of an accidental no deal Brexit.”

Oil-linked currencies have a field day: CAD is one of the best performing currencies as the total counting of votes as part of Canada’s general election sees Justin Trudeau’s Liberal party obtaining a larger share of the support than previously thought, which strengthens his mandate vs left-leaning minority opposition parties. The boost in the price of Oil after an unexpected 1.7mn barrels draw on crude inventory by the EA has also acted as a second driver underpinning the CAD and also the NOK.

The upbeat sound bites by the RBNZ continue: The RBNZ Assistant Governor Hawkesby has reinforced the notion that the Central Bank in New Zealand may not be as dovish in the near term as previously thought, as the policymaker outlined that he remains satisfied with the way interest rate cuts are feeding through into the economy, helping to reduce borrowing rates and keeping the NZD at low levels, while also emphasizing that the pick up in house prices is a positive for the economy. I’d add that the upgrade in Fonterra milk prices, projected to bring in an extra $450m for the economy is yet again another piece of positive news helping in the out-performance of the Kiwi.

The Eurozone ‘flash’ October PMIs eyed: The EU data dump (PMIs) is scheduled for today and without a doubt, barring any major developments in Brexit (unexpected), it will dictate the mood towards the Euro. This time, the calls from most economists surveyed is that we should see a mild pick up in France, Germany and most other Eurpean countries on both manufacturing, services and composite readings.

ECB expected to have limited consequences: The ECB also meets today in what will represent Mario Draghi’s last meeting. Any modifications in monetary policy settings are highly unexpected since this is an ‘interim’ meeting, with the added peculiarity of being the last one by Draghi right after announcing last month’s new QE package. Draghi should continue to emphasize the need for greater cooperation between fiscal and monetary agents to structurally shift the dynamics of diminishing returns from QE.

US data to inject vol in the Greenback: US durable goods orders, expected to see a decline by 0.5%, and core to drop by 0.2%, alongside weekly jobless claims are the highlights in the US session. 

Recent Economic Indicators & Events Ahead

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Source: Forexfactory

A Dive Into The FX Indices Charts

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The EUR index dynamics have turned extremely supportive for those looking to exploit range-profile opportunities, with the overpowering of bids/offers at the extremes dominant in a market that remains in ‘wait and see’ mode until today’s EU PMIs and ECB decision. The vol is certainly about to pick up some momentum, with the broad-range carved out in the last two weeks to be used as a reference, one under which sellers now have control of the mid point, in other words, momentum is building up for a retest of the range lows as the next eyed direction.

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The GBP index exhibited a range-bound pattern near the highs in what’s perceived in terms of market structure as acceptance of higher prices as part of a distribution phase. The limited volatility when compared to the frenzy activity seen 2 weeks ago is a function of the uncertainty that surrounds the next move in the Brexit mess. The market can no longer justify, until more clarity is obtained, a further increase in the value of the Pound as the EU ponders about the length of a Brexit extension and chances are that the UK is headed for a general election.

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The USD index has been unable to sustain its upward momentum after multiple failures at the highs, leading to a retracement in what’s still largely seen as a corrective move following the carving out of a double bottom the prior day. There is a strong area expected to act as a reactionary one (green box) in the hourly where a retest is expected to attract bids as it represents an imbalance of demand as demonstrated by the strong departure it had. Immediately below the market will see a retest of the previous double bottom, in other words, there is significant protection for those speculating on USD longs going forward.

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The CAD index shows a constructive stepping formation even if one must be in high alert as technicals warrant caution given the mid-term resistance we’ve reached, which should guarantee plenty of liquidity for institutions looking to sell the CAD or equally important, for those riding the trend higher and looking to take profits off the table. The last successful rotation has made it to the 100% measured move. Notice, every single leg up on the hourly has had a shorter drive until reaching the next interim top, which adds to the risks of seeing a reversal of the flows from here on out. We’ll be watching for a break of structure to the downside.

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The NZD index has been gaining traction with dip-buying strategies making a determined comeback to create another successful rotation to the upside. Should demand follow through be found above the prior highs, we are looking at about 0.4% of potential gains ahead. It’s encouraging to see that the sequence of bullish legs is increasing in magnitude this week, which raises the prospects of the next 100% measured move to be met as the structure does not suggest we are reaching levels of exhaustion/maturity in the trend just yet.

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The AUD index is playing out a perfect script for the interest of the sellers, initially boosted all the way up to collect liquidity at macro sell-side levels as represented by the red line (daily resistance), only for the momentum to start petering out. Last Wednesday, the first real cracks in the structure could be seen as the first sequence of lower lows and lower highs got printed. Notice, as it’s the case in the majority of times when a fresh leg is found, that the AUD index found opposing bids stalling the momentum at the 100% measured move, with further downside likely as a retest of the backside of its broken support gets rejected.

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The JPY index retains the bearish outlook, with an early promising rise petering out badly as market participants still find value to sell the Yen at better prices. With the retracement in the currency index going almost full extension back down, I don’t see how Yen buyers can make a strong case to return with much conviction in joining the bid until a retest of the previous low. Once that occurs, it will still remain a very risky proposition to endorse Yen longs given the lack of technical evidence backing up the currency at this stage. The Yen outlook looks quite poor.

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The CHF index has landed on a mid-term support level, with buyers nowhere to be found, which makes the acceptance at these lows a dangerous one for further follow through. At a macro level, if the support gives in, the CHF could be looking into the abyss, with a 0.7% decline over the coming days based on the 100% measured move from the last 2-week price action bracket. If buyers return at the lows, a sticky level of resistance on the hourly acts as an immediate cap.

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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