EU and UK Agree on a Brexit Deal, but DUP Says it Will Not Support it
The British pound and EU equity markets rallied yesterday after the EU and the UK announced that they’ve agreed on a new Brexit deal. However, the joy did not last for long, with the currency and EU indices turning south and erasing the deal-related gains, after Northern Ireland’s DUP said it will not support the accord.
Pound Rallies on Brexit Deal, Pulls Back on DUP’s Opposition
It was all about the pound again. After another volatile session, the British currency was found lower against most of the other G10 currencies today morning. It gained only against NOK and USD, while it was found virtually unchanged against JPY. The main winners were NZD, AUD and CHF in that order.
Sterling skyrocketed during the European morning, with cable nearly hitting the psychological zone of 1.3000, after the EU and the UK managed to reach common ground on Brexit. “Where there is a will, there is a deal- we have one!”, EU Commission President Jean-Claude Junker said. Apart from the pound, equity investors cheered the news as well, sending EU indices higher.
However, the party did not last for long. The pound, as well as equities, took a 180-degree spin, giving up the deal-related gains and trading even lower, following headlines that Northern Ireland’s DUP (Democratic Unionist Party)will not support the agreement. The only EU index that closed positive was UK’s FTSE 100, but this may have been due to the pound’s slide.
The UK Parliament will hold a meaningful vote at a special session tomorrow, and without DUP’s support, it may be very hard for the accord to pass through. Thus, with the new deal perhaps set to fail, we repeat that the risk of a no-deal outcome on October 31 sthas not been taken off the table yet. If Parliament rejects the new accord, Johnson will have to ask the EU for a new extension. That said, his stance remains that the UK will leave the EU by October 31 st, with or without a deal, while yesterday, a report said that he will ask EU leaders to rule out a further delay.
So, having all the above in mind, what happens next, in case Parliament rejects the new deal, remains largely a mystery. Remember that in previous reports, we have been saying that the pound could gain o hopes of a Brexit deal, but we were reluctant to trust a long-lasting recovery. This is the point we will turn neutral and wait for fresh headlines before we start examining the next direction of the British currency.
Back to the equity markets, even though EU indices closed in the red, Wall Street ended its session in positive territory, perhaps aided by upbeat earnings from Netflix and Morgan Stanley. That said, sentiment soured again today during the Asian session, perhaps due to the more-than-expected slowdown in China’s GDP for Q3. The world’s second largest economy grew 6.0% yoy, less than the 6.1% consensus, and the lowest rate in at least 27.5 years. The data suggests that the US-China trade war continued to weigh on the domestic economy, and increases the need for more easing measures. That said, the big question is how much easing room is left for Chinese officials to revive growth.
GBP/USD — Technical Outlook
After almost reaching the 1.3000 level yesterday, GBP/USD retraced back down a bit, but still remains above its short-term tentative upside support line taken from the low of this week. Given that the pair already had a great run higher, we may consider a deeper correction at some point. That said, as long as the rate stays above that upside line, we cannot examine any downside moves yet. Also, in order to get comfortable with higher areas, we will wait for a break of yesterday’s high first. This is why we will stay neutral, for now.
If the aforementioned upside line holds the rate from falling and the bulls push GBP/USD above the 1.2989 barrier, marked by yesterday’s high, this might spook the bears from the field temporarily. A rise above the 1.2989 barrier would confirm a forthcoming higher high and we could then aim for the 1.3040 zone, or even the 1.3080 mark, which is the low of May 6 thand the high of May 8 th. Initially, the pair might stall around there, or even correct back down. But, if the rate continues to balance above the psychological 1.3000 area, we may see another round of buying, possibly bringing GBP/USD above the 1.3080 zone and aiming for the 1.3131 level, marked by the high of May 7 th.
Alternatively, a break of the previously-mentioned upside line and a drop below the 1.2732 hurdle, marked near Wednesday’s intraday swing low, could force the bulls to temporarily abandon the field. The pair may then slide to the 1.2656 obstacle, a break of which might set the stage for a move to the 1.2513 level, marked by the low of this week.
FTSE 100 — Technical Outlook
FTSE 100 continues to move sideways in an undecisive manner. This week, the UK index tried to make its way above the 200 EMA on the 4-hour chart and above the 7260 barrier, but the bears managed to take control around that area and pushed the price back down, bringing FTSE 100 further into the red. That said, although we are seeing a slight decline, overall, the index is somewhat flat for now. Our oscillators are not showing any clear direction, which supports the neutral idea for now.
If the price falls below the 7107 hurdle, this might attract more sellers into the game and the index could drift slightly lower, to test the 7077 hurdle, marked by the low of October 4 th. FTSE 100 could stall around there initially, but if there are still no buyers in sight, a further decline may open the door for the 7005 level, which is currently the lowest point of October.
For us to get comfortable with higher areas, we will wait for a clear break above the 7260 barrier, marked by the high of this week. This way the price would also be placed above its 200 EMA and more buyers could see it as an opportunity to push the UK index to the next potential resistance area, at 7333, which is the high of October 2 nd. FTSE 100 may get a hold-up around there, which could force the price to correct slightly. That said, if it stays above the above-mentioned 7260 hurdle, the bulls might take charge again. Such a move could send the price above the 7333 obstacle and aim for the 7388 level, marked near the high of September 26 thand by an intraday swing low of September 27 th.
As for Today’s Events
The calendar is relatively empty in terms of important economic indicators and thus, we expect investors’ eyes to stay locked on the Brexit saga and headlines pointing to how many chances does the new deal has in passing through Parliament tomorrow.
With regards to the speakers, we have five on today’s agenda: BoE Governor Mark Carney, Vice Fed Chair Rickard Clarida, Kansas City Fed President Esther George, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari.
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Originally published at https://www.jfdbank.com on October 18, 2019.
