GBP Back To Reality on Return of No Deal Brexit

Very good morning, Anthony here on the desk, Tuesday 17th of December. So I hope you're doing well. In terms of what I'm going to cover in the session today, got an update, a bit of pressure on sterling currency overnight, gap down, and we're trading down about a point this morning under the UK and European open. So Why has that happened? And what do I think about that piece of information that's come out about Boris Johnson essentially toughening up some legislation within the withdrawal agreement bill he's going to look to push through the lower House of Commons on Friday? So we'll look at that. We're also going to have a quick catch-up on the latest status of the US-China trade talks, a few more comments out of the Chinese finance ministry overnight, and then Trump impeachment. A couple of articles about that because it's likely that the House are going to push forward and pass through the impeachment of the US president. So he would be the third president in history to be impeached, but I'm going to explain to you why I think that, that is a non-event and why actually I think that's a positive for Trump. I know it sounds a bit weird, but when I explain it in more details, hopefully my logic will makes sense. Otherwise, quick look at the charts this morning. Things are relatively quiet. I say that I am mindful of the DAX is just taking a bit of a breakthrough, uh, of what was the overnight Asia-Pacific session and a bit more of a cleaner breakthrough, its pivot level. So the DAX under a bit of downside pressure. In terms of equity stories from a specific company point of view, outperformers: Tullow Oil I think just rebounding after getting absolutely slammed last week on the resignation of their CEO and the cutting of their guidance. So they're up about 4% at the open. Airbus benefiting, of course, from the information that we've had from Boeing looking to halt their 737 MAX production in January. So Boeing obviously coming under severe pressure on the back of that, and that's sort of helping support then their major competitor in France. On the flip side, I just heard the squawk mentioning we did have the Bank of England stress tests yesterday. Now, all banks did pass, that meaning that even in the most adverse, worst-case Brexit, hard Brexit, let's say disorderly, non-transitional environment, banks are seen now very different to where we were 10 years ago with adequate capital buffers to navigate that type of severe economic situation. However, Lloyd's Banking Group was seen as a little bit more fragile than perhaps some of the others, and their shares are down roughly 4% at the open. But as you can see from the cross-asset class mix, yes, equity is seeing a little bit of a downturn, but nothing really too substantial. Bearing in mind, I do think that with particularly US equities, I mean, just put into context where we are, I mean, we hit 3,200. Of course, yesterday, new all-time highs once again when it comes to US indices. You can see overnight this morning, as soon as Europe's come in, a little bit of volume picking up, touching that high print, the record from yesterday that we saw coming in towards the latter part of Wall Street session. So I don't think there's— I wouldn't over-interpret this slight downturn that's being seen at the moment in In fact, I think it's probably quite a normal thing with people just booking some of those longs going into obviously the Christmas period. So if anything, that range kind of play could be the way forward just looking at the session ahead. So what I mean by that is this kind of pivot level providing some of that downside bottom end of the range. I don't think that's out of the realm of possibility at all today to get down another 5 or or so points, and then just kind of keeping an eye on that 3202.25, which now is around there, is the all-time high. So if anything, I just would say it's a bit of profit taking, probably helped, exaggerated slightly by the DAX underperformance, just given the technical breakthrough, the cash open volume pickup. And as we normally see, the DAX can be quite lively at the open, and so the S1 there in the futures just just a short way off from where we are at the moment. Currency markets, I'll talk about sterling in a second, but otherwise euro's very quiet. I mean, in terms of the actual dollar index, I mean, most of movement is being derived from the British pound at the moment, and that is weaker. So the Dixie's up about 0.13%. Uh, oil and gold markets pretty quiet, and the US 10-year, uh, effectively sideways, just hugging the pivot level. Albeit the Bund is up about 29 ticks this morning. So let's have a look at this Brexit headline and what is the deal and, and what, how has it impacted the pound. And let's put that into a bit of context from the UK general election so we can understand the kind of journey that we've been on in, in cable. And so this was it. It actually did come out in The Telegraph, I'm told, at around half past 9 last night. However, I don't think it really caught much market attention until 10 o'clock when the FT ran it, and then all the other news publications were running it. So I just happened to be, as I am a lot of the time in the evening, I just happened to be on my phone, um, and I saw the news when it broke. And essentially, in summary, Boris Johnson will this week publish Brexit legislation that would legally prohibit him from extending the standstill transition period covering relations with the EU beyond December 2020. So if you remember, at the moment, um, what he's trying to now force through Parliament with his majority is the Withdrawal Agreement Bill. This is the WAB, which we're expecting to go through before Christmas recess, and that's expected to go through on Friday. Now that current status is that that then means that all being well, he can deliver then going through the various formalities to complete that by 31st of January, moving us into the transitional or implementation phase. Now at the moment, the legislation would dictate that that's December 2020, so there's a year lock-in. However, what was also previously in there within the WAB was conditions that if it was looking unlikely that he was going to get a deal done by the end of 2020, he would need to inform then his EU counterparts by July at the latest about the request for an extension. And within the clause is an extension of either 12 or 24 months beyond that of December 2020. Now, what's come out overnight is Well, surprising, but I'd say surprising in the sense of, I don't think everyone was thinking that, you know, there was a lot of talk about him now having such a firm majority, would he need to be so strong with Brexit, and could he soften the stance slightly in order to get a deal done with Europe? But it's quite the opposite. And what's happened here then is by doing, toughening up this version of his original Brexit legislation, basically creates a new cliff edge at the end of next year if no trade deal is in place. So we could actually end up where we were, if you remember, in October before the original deadline when it got extended to the, the now Jan 31st. That was when we saw, um, the actual options market pricing in large volatility. Uh, pound was coming under pressure at the time. The risk had to be priced in of an actual disorderly, non-transitional no deal. Now we're talking about a transitional, but still a no deal needs to be reflected in price. So hence the reason why, if I just transition to Cable, uh, I've marked this up just now to see some of the main fundamental catalysts that have created the price action that we've had in Sterling Dollar futures over the course of the last week. And you can see here obviously the sharp gap up on the surprising size of the Tory majority that took us in the futures north of 35, particularly when the Workington and Darlington results came out, which were the first kind of early areas to release that turned conservative. And that was when we hit that kind of peak price in the futures, which was around 135.50. We then kind of backed off, you remember, on On Friday morning, it was almost like just fading the move in a sense that majority was the baseline expectation. We broke a couple of key technical points as well as psychological handles. We came back down. We then rallied as markets reopened on Sunday night, perhaps a degree of relief. However, we've now had a gap down. I mean, looking in proportion to the size of the gap up on the election, I mean, the last night's one is very small, but a gap nonetheless. And importantly, it's a gap that puts us below the price point of what was then the initial pullback we had on the morning of the results last Friday. So that now I think will form a pretty decent and strong area of resistance. You can see here the market on the gap down responding on the S1 on the daily pivots, came back up to that exact level. So you you would have had— and I know talking to Liam here, one of the guys on the trading floor, he's a bit of an early bird and he was up at 5 AM this morning— and yeah, really great entry point to get in on the short there on the digestion of UK European players coming in. Really, you know, a lot of people would have been asleep last night when that initial news came in. So looking for a secondary phase reaction on the gap, and you could have got a nice entry on that S1 stop just above on the previous low on the pullback to the low that was formed on Friday and just rode the move all the way back down, playing the price movement that we had on the initial movement on the reopening of Globex trade last night, scaling out and perhaps even keeping some on this morning to target back down to the gap fill which we briefly had last night, but back down to targeting towards 132.75, 80. So yeah, excellent trade for him. Early bird does indeed catch the worm, uh, in that, in that sense. Um, so yeah, looking at it, stepping back, you know, we are pretty much where we were on that Thursday, on the day of the actual vote in itself, before the actual news broke and came out. So quite interesting that, that, that spike that we had, multi-point, of course, already taken back, and we're only just a few days post that, that big political event. And what do I actually think about this? Because I think that's a different thing. Well, let me just flash this up. Let me transition my screens again. This is the Brexit timeline. Now, of course, we can kind of scratch out a couple on the left-hand side. We've had the election, we've had the EU Council meeting, the potential vote on the divorce deal is likely to happen at the end of this week. We know then he's done his cabinet reshuffle. Yesterday, so that's complete. He's now— looks like he's going to repen the withdrawal bill to make it a little bit tougher than on Brexit than the original legislation. The Queen's going to give her speech on Thursday. The WABE will be heard and voted on on Friday. That then allows them to go on Christmas recess on the 23rd of December. They will not return to work. Potentially could be a movement on it until the 6th of January, and then the deal to be ratified by the UK and approved by the EU Council and EU Parliament in January to reach that, of course, deadline that we all know about, which is the 31st of January. Then comes that point of Phase 2 negotiations pick up in Feb. And then, and this is one again that just to be aware of and how this current piece of law works, the deadline for extending transition period is actually the 30th of June as far as what, what's existing at the moment. So that means then that Boris Johnson basically— and the reason why I was so sure of the fact of getting extension is that he basically needs to have a complete trade deal with Europe in 4 months, which I think is absolutely impossible, quite frankly, from a legal perspective. Perspective. Now what this means then is, well, what he's doing here then is, you know, what, what's the thinking? And thinking about this last night, my first reaction was that for me, I've been thinking about, well, how can I think Boris Johnson absolutely will still extend the transition period irrespective of this legislation passing? Let's not forget legislation can change. As it is now, can change again in the future. So I think, sure, he gets his hard Brexit legislation through, he then has a good positioning to go back to Brussels quite aggressively. But more importantly, I think Boris and his team know that Europe are not going to buckle in this situation. He's going to run into a lack of progression But importantly for Boris Johnson, and what's at the heart, I feel, of this move, is that now he's going to be allowed to pivot from the people versus Parliament, which is what won him this election to a resounding result. I think he's going to pivot that now, that narrative, to us versus them. Us being Britain, them being the EU. I think then when inevitably he goes cap in hand, because there's no way he'll execute a no deal. This is his greatest bluff. He will then go back to Europe at the end of 2020, and then people will forgive him. People will not now say Boris didn't deliver Brexit, because he will be banging the drum as he was in the build-up to the election. But instead of people versus Parliament, he'll be saying, "Us versus them." It goes completely tribal in that sense. If you're talking about human psychology and behavioural, the way societies function, people will forgive him for changing the narrative and missing deadlines just like he did. I mean, technically speaking, giving his own words, Boris Johnson should be dead by now, but he's not. And no one seems to have batted an eyelid. And I think this is a stroke of genius on the, the puppet masters that control Boris, because I think ultimately they're going to extend, but they're going to get away with it, and the British people are going to forgive them, just like they did with him not delivering on Brexit the first time round, to have such a great, fantastic result with Brexit. So in the short term, I think people have got to price in this negatives, and I've just seen the pound flash on my charts Yeah, look at that. So Liam, great trade if you're still holding some of that. I mean, as I was saying, targeting real— just a real nice setup on that trade to get in. If you've gone in early, nice risk-reward. You're coming out of some of the— at the bottom end of that original spike, coming out of some more on that original high that was on the 12th, and then letting it run. If you've got a few more on, I guess we're looking at the downside targets now. Probably, yeah, exactly where we are at the moment, just bringing in some of that price activity late on the 10th, get that initial high on late on the 11th for the break higher, then probably just closing out the trade. I mean, if that is how he's traded, I would say 20 past 8, go home, job done, uh, in that respect. So yeah, I mean, the pricing in here negative, I think fundamentally all makes sense. But, but longer term, what I do think is that as per what I've just described, I think it's an unsurprising tactic in regards to the politics behind this move from Johnson. I think actually the toughening of legislation puts no deal back on the table, allows him to pivot the narrative towards us against Europe. He then accepts the extension at some point in 2020, he blames Europe, breaks his previous commitments, but washes his hands of any accountability, and the show goes on. So again, that's, that's my initial interpretation of what we're seeing on that issue. Next then, um, just having a quick look at US-China. China to grant more regular tariff waivers for US farm imports. This is all a little bit of extension of the agreement on Phase 1 that we had at the end of last week. So China will provide retaliatory tariff waivers to buyers of US farm products on a more regular basis after the countries reach that Phase 1 deal, according to people familiar with the situation. The Trade Secretary, Lighthizer, has said he expects the 86-page trade agreement to be signed by him and his counterpart, Vice Premier in China, in early January in Washington. So, uh, still relatively positive on, on that regard for the time being. A lot of jokes though circulating, I saw on the Twitter world, in regard to the whole 'when are we going to start getting him playing the market' with Phase 2 getting done. The other thing, just briefly to mention, because I think it only warrants a brief mention because I really think this is just a bit of a media circus rather than it is something influential for markets. But Donald Trump is this week likely to become just the third US president to be impeached when the Democratic-led House of Representatives votes on charges stemming from his efforts to pressure Ukraine to investigate political rival Joe Biden. The House likely to take up impeachment on Wednesday, setting the stage for a vote later this week. The Democrats enjoy a 36-seat majority in the House. So they're expected to win an impeachment vote. It only requires a simple majority. However, that then needs to go to the Republican-held Senate where the red party holds 53 of the 100 seats in the Senate. So net, net, it's not going to pass because it would require two-thirds majority of those present to remove him from office. So this is kind of similar to what's happened before, of course, with the likes of Bill Clinton got impeached but never went through. Same thing's going to happen, I think, with Trump here. And if anything, not sure if you saw my tweeting this morning, perhaps slightly controversial, but I actually think Trump being impeached is a good thing for Trump. I think it helps his case. I think it legitimizes his argument for a witch hunt. And it comes for me in the backdrop of all-time record high US stocks and low unemployment. So for me, it helps even further polarize this political divide, and it strengthens his case, I think. So yeah, I don't think it's a market-moving thing, and I think it's something that's going to create a lot of— or take up a lot of airwaves. But yeah, I wouldn't stress too much about it from a trading point of view. Quick look at the calendar for what's to come. We have already had the RBA minutes, they came out overnight. So if you have missed them, they basically said they're going to revisit policy in Feb 2020 but has the ability to add further stimulus if needed and is ready to ease again if required. So the Aussie, as I speak, is at session lows. So you're aware it's been slowly weakening from the overnight session, already through its S2 in the, in the futures market. From data in the morning, you've got UK unemployment rate, employment change, and weekly average earnings. Then leading us on into the US afternoon where we're going to get building permits, housing starts, and the US industrial manufacturing production, and the weekly API crude oil inventories. They'll come later on this evening. Speakers-wise, a couple, bit of a mix between, well, really ECB, Fed, and the Bank of England. ECB speaking, Kazmir at midday, ECB's Lane at 1:30, and then from the Fed you got Kaplan, Williams, and Rosengren all through the afternoon. Kaplan will be a voter in 2020 leaning dove, Williams a voter at present, as too is Rosengren with neutral and hawk stances respectively. And then Bank of England's Mark Carney is actually speaking at a dinner uh, later on this evening at 7:15. So that's it from me. Let me hand you over to Sam. You can go over some of the charts a bit more detail. Uh, I wish you a good day. Thanks very much.

Yeah, just as I'm coming on, you can see the pound has filled the, uh, the gap on the futures there. You can see— let's put this on to a 60-minute chart— you can see that just now fill in that gap. Bit of support, as you'd expect. What a place to take profit if, uh, if you were short, uh, overnight or any time this morning, really. But yeah, filling that and, uh, looking quite heavy, it has to be said. But keep a— keep an eye on probably how we finish the 30-minute candle here. Could be a bit more, uh, of a guide. But yeah, certainly this, this market, which is over 300 pips down since Friday's high, which is a move in itself. But yeah, being pretty technical, it has to be said. You can see we've broken through, and the first part of support that we had this morning, like Anthony was saying, was the high that we had back on, uh, the 12th on the election morning. And we've then broken through on the second attempt and then closed that gap. And maybe just spiking through a bit, 132 in the futures, uh, below that. But Marco's saying to keep an eye on where we finish the, uh, the half hour there. Decent move to the downside. Um, I remember from the election, Alex got short up at the top. I'm not sure if he's still holding now, but I mean, what a, what a trade, what a call it was. Uh, certainly, you know, a chat amongst us saying that we, we believe it's going to come down before then, you know, drift higher into next year. But yeah, real failed attempt of pushing that high and we've drifted lower. And obviously an extended move today, already down 166 pips since the, the open on the futures. So big move in the pound over the last couple of days. Euro just been dragged down a bit here as well, worth keeping actually an eye, other than the 112 handle, but just a bit below here you've got the S1 and lowest, lowest part of, of the, the morning yesterday around 9 AM. We keep a watch on that because if that goes, and you know, you're also going to be coming into the area where you're most likely to find one of these trend lines. And let's just put this in, of course, on the March contract now, so the left-hand side looks a bit more thin. You can see around that area you're going to have some of these trends that do come into play. And of course, that is going to be pretty significant for the euro because if that was to, to break, well, suddenly you're looking at euro coming back down again. Despite obviously a decent push, which we've seen time and time and time again this year for the euro. Let's wait for this to, uh, load up here. Now looking on the daily chart, what has the euro done all year? And let's just bring in— push higher, drop down, trend higher, then drop down. And are we seeing that yet again here? Well, that trend line could be a bit of a guide for that. I think maybe the opportunity-wise would be as well if we were to get below that and and close significantly below, you know, maybe the, the highs that had on the 4th, which were quite a key guide over the recent months for where direction could go. So back below there, well, you know, could absolutely drift lower. Yesterday, gold, um, if I was putting this into with the pivots, we, we came up to test what had been quite a, an interesting level historically for, for gold around 1480. 3 or so, some decent price action again around there. Was also at the time a double top. I know one of the, uh, the traders in, in Stage 3 took this and, uh, held it beautifully. And you also got that trendline break. I mean, and looking at this, what a, what a good trade even the trendline break would have been. But yeah, rode that down towards near the low and actually probably got out literally the, the lowest price there. It was a fantastic trade. However, a bit of um, you would, you would argue a bit of risk off this morning. Gold pushing, uh, to that top level. So with the significance of that, really do keep an eye on here. Maybe you want to drag it towards yesterday's high on the R1 just to be super sure. And it probably brings in now a new range, those highs, and then down to yesterday's lows, which are pretty much bang on today's S1. So quite a key mini range there for, for gold. 47 and a half 14.77 and a half to the downside and call it 14.85 to the upside. If that is to break to the downside, yet again, just want to reiterate the importance, uh, really of this trend line from the low that we had on the, on the 12th of November. If that is to go, it could be bye-bye gold. But a break above here and maybe 14.90, well, actually now you start getting a bit more confident in this market, could be looking at 1,500 again. So gold very much set waiting for a bigger move. It's obviously, other than that push lower that we had on the, uh, on the 7th of November, it's kind of been up and down, you know, with the trade comments understandably, um, you know, that were positive and then negative. It was hard to really get a direction what the Fed going to do as well. And it still feels very much like we're waiting for a bigger move here. So for gold, for me, you know, you would be comfortable getting in, uh, you know, along maybe above 1500 medium term, or short if we were to break that trend line. Intraday, I'll just keep it towards that range and let that guide price action. S&P, we did a little chat during the day yesterday about the, the handles on the futures, and let's just do that again here now. 3100, when we first reached, uh, back on the 8th of November, we came lower. The next time we broke just a bit above it and came lower again. Let me just make this a bit clearer to see. Uh, it took us 1, 2, 3 days of testing that level with good resistance before finally breaking through, and then it offered a good level of support on the way down. We're now obviously at 3,200. First day yesterday, uh, we had a little spike through to then come back down 7 points. We're now— tested it again, we've come back lower. Yes, helped by the overall mood in the market, but just the importance of these round numbers, uh, on the, on the futures is, is quite significant here. So where could we go to, to today to perhaps find some support? You know, while the pivot is not a bad place, you've got a decent bit of resistance there from yesterday, uh, the low of the day, that's a point to consider. And then maybe below there you would be eyeing up the, the high that we had back on Friday the 13th, 31.88. That's another key level as well. Uh, we're getting a cue perhaps from what the DAX or Euro Stoxx are doing as well, but stocks just under a bit of pressure today as well. Potentially later on, if you don't like the idea of buying a dip and you want more of a continuation strategy into the afternoon, again, not a, not a bad decision to do that. You can see this triple top on the, on the 15-minute here. A break of that could well be the preferred choice I would say with these lows, just considering the time of the day, the range trade isn't bad, but maybe you want to see a bit more confirmation before looking to get in there as well. Quick look over at oil before we have a look at the European equities. It's, it's not doing too much, to be honest. And we were actually, you know, just talking about, um, when I was doing the charts for the strategy, what, you know, what's the main driver for, for oil this week? You know, OPEC's kind of done. Obviously trade comments could swing this market one way or another, but that again seems like we're perhaps through the worst of the year now. And, you know, other than the inventories, you know, I'm not expecting too much in the way of movement for, for oil. And that has kind of resembled yesterday. And of course tomorrow, this morning, you're not gonna see a great move either. But 60/40 to the upside, let's keep an eye on that as well from the beginning of the week. Let's have a look, see if we can get some sort of trendline. That's lovely. This low here, 15th overnight to the 16th yesterday, and then this morning, 1, 2, 3, nice test on that. Break of that, down to $60 pivot. It's not a bad little trade to perhaps consider. And then to the downside, another key level support, $59.80. I'll be keeping a watch out for break of yesterday's highs. You'd be targeting the spike that we had on Friday, uh, the 13th. DAX and Eurostoxx this morning just breaking through their pivots, looking pretty identical, it has to be said. We've just come up to find, or look to find, a bit of resistance on what was the initial low, uh, of the morning. Let's keep a watch on that to see how that reacts, along with the low before we really broke down, uh, around the pivot. So those would be the key resistance points that I'll be watching. For favor, I would favor, I should say, the, the pivot, just because it, you know, seems that's where the selling really started this morning. Also, you can see a break of this trend in the early hours acted as such good resistance to the upside. So if we at any point do push higher, just be aware of that as well. Quite a lot of support has to be said for equities in both Europe and the States below where we are trading. So it's not like I'll get too ahead of ourselves here, just in the early morning. Quick look over the pound just to finish. Again, you can see, uh, still having another go at just trying to confirm that push below, uh, the gap from here. You can see that 15-minute close was above. Can we get one below? And I think that's when you would get maybe a bit of an extension below 132. But again, a failed test of that, and you can see a reversal as well. So interesting price action this morning. A couple levels really set up quite nicely. Let's have a quick look over just to see the morning. Uh, so you've got that UK data at 9:30, unlikely to really do too much, but again, keep an eye on that. It's coming out in 50 minutes, and then it's quiet for the morning until we come into the afternoon. And a relatively quiet week data-wise for the US anyway. Um, but, uh, yeah, one to, to bear in mind. But any questions, as usual, please do let us know. The pound moving Uh, stocks have got some nice support just below where we're trading. Gold at a massive level. Is euro about to do what it's done all year? Oil, not much going on. And just keep an eye on any of those, uh, previous support levels in the DAX. That could give a guide for the rest of the market concerning risk. Hope you'll have a good trading day, and I'll catch you all in the chat later on.