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by Charalambos Pissouros

Brexit Deal Wins, But Johnson’s Timetable Loses

The British currency was once again in the financial world's front seat yesterday, ending as the main loser among the G10 currencies. It initially gained after the UK Parliament voted in favor of UK PM Johnson’s Brexit deal, but was quick to reverse south as MPs rejected his legislation timetable. The broader market sentiment was also hurt, with all three US indices, and most of the Asian ones today, closing their session in the red.

Pound the Main Loser as UK MPs Reject Johnson’s Brexit Timetable

The British pound traded lower against all the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed the most against JPY, USD and CAD in that order, while it lost the least ground versus AUD and NZD.

GBP performance G10 currencies

And the show goes on. For another day, it was all about Brexit, Brexit and… Brexit. Yesterday, the UK Parliament held two votes related to the deal agreed between the UK PM Johnson and the EU. Initially, lawmakers passed the second reading of the Brexit deal, but then, they rejected Johnson’s timetable to rush legislation in just three days, something that led the government say that it would halt the process. All this means that the UK is unlikely to be able to complete its exit from the EU by October 31st, the current Brexit deadline.

The pound edged north after the first vote, but hit resistance near the psychological zone of 1.3000 against its US counterpart and after the second vote, it tumbled to underperform every other G10 currency. Where it may be headed next still remains largely a mystery. With the clock ticking towards October 31st, it is still unknown when, how and even whether the UK will separate paths with the EU.

Now, the ball is on the EU’s court. Will they grant a new extension? Remember that on Saturday, forced by law, UK PM Boris Johnson sent a delay-request letter, but unsinged and accompanied by another letter – this one signed – arguing against any delay. EU Council President Donald Tusk said yesterday that the remaining 27 EU members should support a delay towards the end of January, adding to signs that a disorderly exit next Tuesday could still be averted. That said, with France saying that it is willing to grant only a few more days, and not a longer extension, we cannot say for sure that EU member states will reach consensus.

Apart from the pound, yesterday’s developments had an impact on the broader market sentiment as well. While most major EU indices closed in positive territory (the exception was Spain’s IBEX 35, which closed 0.24% down), all three of the US indices traded in the red. The S&P 500 and the DJIA slid 0.36% and 0.15% respectively, while Nasdaq fell 0.72%. Today, most Asian indices finished lower as well. Although Japan’s Nikkei gained 0.34%, China’s Shanghai Composite lost 0.43%.

Major global stock indices

GBP/AUD – Technical Outlook

On October 16th, GBP/AUD managed to hit a new high for this year, at 1.9093, and after that, it started drifting slowly to the downside. The rate continues to move below a short-term downside resistance line drawn from that high and as long as the pair doesn’t violate that line, it could end up sliding a bit more in the near term. That said, overall, GBP/AUD is still above its medium-term upwards moving trendline drawn from the low of July 30th, but had recently distanced itself quite bit from it. And also, there are some strong support levels, which the rate would need to overcome first, before moving slightly lower in the direction of the above-discussed upside line. This is why for now, we will remain neutral and wait for a break through one of our key levels, before examining a further directional move.

A drop below its key support area, at 1.8715, which is marked by the high of October 14th and the low of October 17th, could clear the path for a further slide, potentially targeting another strong support zone, roughly between the 1.8495 and 1.8520 levels. That zone might provide some good support initially, from which GBP/AUD could rebound back up a bit. That said, if the rate stays below the 1.8715 hurdle, we may see another round of selling, possibly leading the pair again to the area between 1.8495 and 1.8520, a break of which could push the rate slightly lower, to test the 1.8430 mark, which is near the highs of October 3rd and 10th. This is also where GBP/AUD could end up testing the 200 EMA on the 4-hour chart, which may provide some additional support.

Alternatively, a break of the aforementioned downside line and a rate-push above the 1.8935 barrier, marked near the highs of Monday and Tuesday, could attract more bulls into the field and GBP/AUD might drift higher again. This is when we will aim for the current highest point of this year again, at 1.9093, a break of which could send the rate to the 1.9231 level. That level is marked by the high of April 27th, 2016.

GBP/AUD 4-hour chart technical analysis

GBP/JPY – Technical Outlook

GBP/JPY also started drifting slightly to downside, after the pair hit its strong resistance near the 141.50 barrier. The rate fell below its 21 EMA on the 4-hour chart and seems to be willing to move a bit lower. That said, before the rate could move a bit lower, it would need to overcome a few strong support barriers. Also, let’s not forget that GBP/JPY is still trading above its short-term upside support line taken from the low of September 3rd, so any pullback towards that line could still be classed as a temporary correction. From the short-term perspective, we will wait for a break of one of our key levels, before we may consider a further near-term directional move.

A drop below the 138.38 hurdle, which marked by an intraday swing low of October 16th, could send the pair to the 137.47 obstacle, a break of which may force the pair to test the 136.45 area, marked near the low of October 15th. If the pair stalls around there, it might even correct back up a bit. That said, if GBP/JPY stays below the 138.38 zone, this could lead to another round of selling, as the bears may see it as a good opportunity to step in again and take advantage of the higher rate. Another slide could bring the pair to the 136.45 area again, a break of which might clear the way to the 135.50 level, marked near the low of October 14th.

On the upside, we will only get comfortable with higher areas if we see a push above the high of last week, at 141.50. This way the pair would confirm a forthcoming higher high, which might attract more buyers into the game. The rate could then accelerate to the 142.87 obstacle, a break of which might set the stage for a test of the 143.77 level, marked by the low of April 25th.

GBP/JPY 4-hour chart technical analysis

As for Today’s Events

The economic calendar is almost empty in terms of economic indicators. The only one worth mentioning is the EIA (Energy Information Administration) weekly report on crude oil inventories, which is expected to show a 2.232mn barrels increase, which is less than the previous 9.281mn. That said, bearing in mind that yesterday, the API report revealed a 4.450mn build, we would consider the risks surrounding the EIA forecast as tilted to the upside.

As for tonight, during the Asian morning Thursday, we get Australia’s and Japan’s preliminary manufacturing and services PMIs for October. The Australian indices are expected to have declined to 49.0 and 52.2, from 50.3 and 52.4 respectively, while no forecasts are available for the Japanese ones. The BoJ’s own core CPI for September is also coming out, but no consensus is available for this release either.

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