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Forex markets move — and issue a different kind of risk warning

  • Price action in Brexit sensitive markets is raising some eyebrows.
  • GBPUSD fell away overnight in an expected move after Saturday saw the UK political stalemate hold firm.
  • As the London markets opened for Monday, sterling received major support on the back of little ‘real’ news.

The weekend saw the Brexit deal fail to gain sufficient support in the UK House of Commons. The vote, which was described as being on a knife-edge, was actually pulled by the government at the last minute. Until 6:55 am UK time, the forex markets reacted as expected to the news.

The consensus on Friday was that it would take confirmation of the Johnson deal being signed off to take price over the 1.30 level. The tight trading channel seen in the run-up to the close was 1.29363–1.29640.

GBPUSD — One-minute candles — Friday 18th October 12:46–Monday 21st October 02:39

Source: MetaTrader

The forex markets were closed until 11:00 pm UK time, Sunday 20th, and when they did open, cable (GBPUSD) fell away. Friday’s closing price was 1.29487. The opening price of the Sunday / Monday session was 1.29195 — a 0.25% fall with a significant gap thrown in for good measure. The logical reaction of the markets to a deal breaking carried on until close to 7:00 am UK time when the weakening pound suddenly found strength. The intraday low is still marked at 1.28879, but price has broken through the 1.30 level. Halfway through the European trading sessions, GBPUSD printed at 1.30060.

GBPUSD — 30-minute candles — 9th October–21st October

Source: MetaTrader

A gap of some sort was expected due to the major political news being released on a Saturday rather than when markets are open. It was expected that GBPUSD would show a break to the upside on news of the deal passing and to the downside on it not. The markets, after all, took a long time Friday, trading in that tight channel where buyers and sellers priced in their interpretation of the situation.

No news is good news?

The interesting feature of the Monday price chart is the turning point and rally to close the gap, and then print prices higher than seen last week, above the significant 1.30 price level. The move started at 7:00 am UK time and came as something of a surprise. With the upcoming agenda unclear and politicians keeping cards close to their chest, logic would have pointed to a move to the downside followed by sideways tracking. It’s difficult to explain the actual price move in terms of news flow. The BBC News website, which has a ‘rolling news’ page didn’t even open for business until 11:46 am.

Friends in high places

 Analyst reports from the big banks have been shared with key clients, and as time has passed, these have also trickled down into wider consumption.

Deutsche Bank said in a research note that “the outlook for a Brexit resolution remains constructive,” and that it would “retain our constructive outlook on the UK, and long sterling and short UK real yield recommendations.” (Source: CNBC)

Reuters reports that Goldman Sachs analysts shared on Sunday that they were lowering the probability of a no-deal Brexit from 10% to 5%.

Citi analysts said their base case is now that the UK will experience an orderly Brexit.

This confidence could be explained by various factors. The exact breakdown of the voting patterns can be an indicator of whether or not any future attempts might be successful. A more cynical viewpoint might be that the big banks are major funders of the political parties and their campaigns. It is possible to imagine the conversations held over the weekend that offered greatest clarity were those that took place as close as possible to the movers and shakers at the centre of the political arena.

“Figures from the Electoral Commission show that Citigroup and Morgan Stanley donated £250,000 each to the official Britain Stronger in Europe group ahead of the June 23 referendum onBritain's membership of the European Union. Two other US banks – Goldman Sachs and JP Morgan – donated £500,000 each to the Britain Stronger in Europe campaign.”

Source: The Telegraph

There are, of course, multiple instances of firms abusing their position. High flying hedge fund SAC Capital Advisors in November 2013 pleaded guilty to insider trading and paid close to $2bn in charges.

Technical analysis

 The daily technical from TradingView shows buying signals:

Source: TradingView

The direction of the market might currently be driven by fundamental analysis, but the technical analysis can offer an insight into how the price moves.

Price is currently at 1.2981, meaning it is above all the daily moving averages. The five-day simple moving average is the highest of the below list of averages to be followed, and that is currently set at 1.28858.

Moving averages — daily GBPUSD

Source: TradingView

The classic R2 resistance level (1.2900) has also been breached. Price continues to trade near the 1.30 level.

Some of the politicians involved in the political process have come forward to offer the public an update:

“’The EU does not want, and does not want to be blamed, for a no-deal (Brexit)’, [said] one EU official, who is aware of the EU’s position but did not want to be named due to the sensitivity of the topic… They added that Brussels would not ‘rush to extend’.”

Source: CNBC

The officials are still operating on a no-names basis but are at least offering some guidance to the markets.

Traders don’t need to engage in conspiracy theories but do need to be aware just how far up (or down) the communication ladder they are. The moves in sterling in the early parts of Monday trading demonstrate how being self-aware of the strengths and weaknesses of any individual trader’s set up is an important element of risk management.