Sive Morten
Special Consultant to the FPA
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Greetings guys,
Today we will take a look at GBP instead of Gold. Gold mostly keeps the same scenario and daily updates should be enough to monitor ongoing events there. Conversely, GBP now stands in the center of tangle of different events, which keeps market in tension. So it will be interesting try to unravel it a bit.
Yesterday, in EUR report we've mentioned some common things that support dollar rivals in short term. The same relates to GBP as well. Here we bring some additional GBP specific moments.
Fundamentals
Let's start from special Reuters report as it touches specific topic of investors sentiment. Foreign exchange derivatives indicate markets are bracing for a fresh round of volatility in sterling, with investors ramping up purchases of options giving them the right to sell sterling if Brexit uncertainty escalates.
British assets suffered a sharp selloff after British Prime Minister Theresa May’s Brexit deal sparked a wave of resignations, raising serious doubts about her leadership and whether the United Kingdom can avoid a disruptive exit.
It regained some poise on Friday but investors are taking no chances; market players report a dash for derivatives markets to ensure portfolio returns are not wiped out by wild sterling swings.
“There is a lot of uncertainty out there and investors are doing the prudent thing by adding more protection,” said Jennifer Hau, an FX strategist at Credit Agricole.
In the last few weeks, despite the dramatic daily moves in sterling, traders have appeared reluctant to push the currency outside recent ranges until there is a clearer political resolution in sight. Thursday’s drop only took the pound back to October levels.
Now, as worries grow that May - if she survives - will fail to get her deal through parliament, financial options suggest traders have turned deeply pessimistic on sterling’s outlook.
One-month sterling risk reversals GBP1MRR=, an indicator of investor views on the currency’s short-term direction, are now at their lowest levels since September 2016.
The lower risk-reversal prices trade at the more investors are demanding put options - which give investors the right to sell the pound at a future date - over call options, which give investors the right to buy.
That signals that investors are preparing for more sterling weakness by either betting on more downside or buying protection should the currency take another leg lower.
That rush to protect portfolios is also reflected in market expectations of swings in the price of the pound between now and the end of 2018.
One-month implied volatility gauges have spiked to their highest levels since July 2016. At over 15 percent, one-month volatility has entered territory normally reserved for emerging market currencies. Indeed, one-month volatility is now trading higher than that of the Brazilian real.
“I’m just trying to keep track of what’s going on and it is like watching the car crash unfold in front of us,” said David Keir, Edinburgh-based co-manager of the TB Saracen Global Income and Growth Fund.
“It clearly feels like maximum uncertainty at the moment.”
All options are on the table as May fights for survival, including the possibility of a UK general election or a second Brexit referendum.
Investors appear most concerned about the next few weeks - one-month options that help protect portfolios between now and mid-December are trading at their biggest premium over 12-month options in more than two years.
The market remains heavily short on the pound, and investors are well aware that any glimmer of a breakthrough could trigger a massive relief rally.
Hedge funds deeply pessimistic on the currency have been caught out when Brexit negotiations take a sudden turn for the better.
Didier Saint-Georges, who helps manage more than 50 billion euros (£44.4 billion) at Carmignac Gestion, says investors should avoid direct exposure to the currency if they can.
“It could really go a big way in both directions,” he told the Reuters 2019 Investment Outlook Summit.
So, market situation and volatility shows that investors nervous. Indeed, GBP stands net short, but last week data shows that net position has been contracted. Even hedgers reduced their exposure to downside risk by closing small part of long position and opened 10+K contracts in opposite direction. It seems that bearish pressure has become lighter last week:
Source: cftc.gov
Charting by Investing.com
Although these minor changes do not let us talk on breaking of major long-term tendency, but they could trigger retracement in shorter-term perspective. Let's try to cover this subject by technical analysis.
Technicals
Monthly
Last time we talked about GBP at the end of September. Monthly chart has not changed significantly. As you can see price is coiling around Yearly Pivot 4th month in a row since August. November action stands inside October range. Trend stands bearish here, no oversold. Bearish context here still stands intact. GBP tries to hold above last major 5/8 Fib support area of 1.29.
Long term charts mostly stand in relation to fundamental processes rather some technical short-term issues. From this point of view GBP action on monthly chart absolutely corresponds to our view on UK economy and its perspectives. Once our previous target of YPP has been completed at 1.30 area, now we could talk about YPS1 at 1.2440.
At the same time we remind you our long tong all-time AB=CD OP target around 0.95. Recent bottom of 1.22 is, actually, COP target.
GBP is unique currency. It is driven by political events more than any other currency. Investors now even rare talk on statistics and economy factors. Policy stands in focus. And the most important driving factor of course is relation with EU as economical as political. UK is an island, and it strongly depends on its closest neighbor - EU. Not only in terms of mutual trading, but also in terms of goods logistic. If this flaw will start to wide - 0.95 of GBP/USD could become a reality. In fact, our long-term OP level stands not as doom, but as indicator of worse scenario, if it will be realized.
Despite loud self-congratulatory in media - in reality nothing has changed. UK pays contributions to Brussels, UK has no customs border, UK stays under EU tax and customs law - all this stuff till 2020 but it can't take part in adjustments of this law. What has been changed, what T. May has agreed with EU? I don't understand, only term - 2020 maybe.
Finally, pivot framework looks very bright here. Cable has failed to break through Yearly Pivot resistance 1. This fact tells, that upside action to 1.40 was just a retracement within long-term bear trend, and this retracement is over. Following this logic, current downward action is another leg of bear trend.
Based on monthly picture, we could suggest that downside action has more chances to happen rather than not to happen. At least currently there are no signs here that give at least minor hint on possible reversal.
But in shorter-term perspective, some fluctuations inside November range are possible.
Weekly
Technically, GBP here, on weekly, shows very comfortable situation. The story stands around the lows, guys. While these lows stand - cable keeps chances on upside action. Once price will break it - downside action will continue. This is due some reasons. First is, as we've said - GBP at major 5/8 Fib support. If price will break it - no barriers are below it.
Second, in fact, here we have bullish grabber and it suggests action above 1.3170 area within few weeks. This pattern also is valid until price stands above its low. It means that any bull trade that we could try to take here are based on the lows and should be taken against them. This makes overall situation simple to control. In fact for trading and position taking we need the range of last week only.
Still, on broader view, we already have talked about it - COP target of large AB-CD pattern stands at 1.25 - right below the market. Despite that this could lead to appearing of butterfly pattern - it makes any long-term bullish trade more risky.
Daily
Here we have "222" Buy in place, as GBP has completed AB=CD pattern well. Also price has hit daily oversold area and it should support it for awhile. Negative sign - too fast drop on CD leg. In fact, CD leg is just one nasty candle down.
Intraday
On 4H chart we see nothing special, except strong 1.29 resistance area. Since bullish setup has solid flaws - major task for those traders who intends to go long is to take position as closer to the lows as possible. It means that the deeper retracement on intraday charts you could catch all the better, especially if it also will take the shape of some bullish pattern:
For example on 1H chart, as market has completed minor AB-CD pattern, retracement has started. Previous bearish momentum is strong, so it is logical to watch for AB-CD retracement. First it is close to the lows, but It also could give us "222" Buy pattern.
But, for the sake of fairness, it is worth noting that bullish scenario is weak and it would be better to not count on real upside reversal. Upside AB=CD on 4H chart is possible, but not more, at least now. Overall action doesn't show signs of thrust, it is rather gradual, but real reversal demands impulse.
If you're looking for short-entry, it is better to wait a bit because market at oversold and grabber on weekly chart is still valid. Upside retracement definitely gives better entry price and we also could get "222" Sell on 4H chart. Only if it will be clear that lows will be taken, short position will make sense.
Conclusion:
Short-term situation on GBP stands as compressed spring. Although longer-term view still looks bearish, it doesn't mean that on coming week GBP can't show upside retracement. Major indicator of sentiment is recent lows. Pullback is possible until they stand. Thus, bull traders could try to buy against them as closer to the lows as it will be possible, while bears are better to wait a bit, since market stands rather close to oversold and better opportunity will appear sooner rather than later.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Today we will take a look at GBP instead of Gold. Gold mostly keeps the same scenario and daily updates should be enough to monitor ongoing events there. Conversely, GBP now stands in the center of tangle of different events, which keeps market in tension. So it will be interesting try to unravel it a bit.
Yesterday, in EUR report we've mentioned some common things that support dollar rivals in short term. The same relates to GBP as well. Here we bring some additional GBP specific moments.
Fundamentals
Let's start from special Reuters report as it touches specific topic of investors sentiment. Foreign exchange derivatives indicate markets are bracing for a fresh round of volatility in sterling, with investors ramping up purchases of options giving them the right to sell sterling if Brexit uncertainty escalates.
British assets suffered a sharp selloff after British Prime Minister Theresa May’s Brexit deal sparked a wave of resignations, raising serious doubts about her leadership and whether the United Kingdom can avoid a disruptive exit.
It regained some poise on Friday but investors are taking no chances; market players report a dash for derivatives markets to ensure portfolio returns are not wiped out by wild sterling swings.
“There is a lot of uncertainty out there and investors are doing the prudent thing by adding more protection,” said Jennifer Hau, an FX strategist at Credit Agricole.
In the last few weeks, despite the dramatic daily moves in sterling, traders have appeared reluctant to push the currency outside recent ranges until there is a clearer political resolution in sight. Thursday’s drop only took the pound back to October levels.
Now, as worries grow that May - if she survives - will fail to get her deal through parliament, financial options suggest traders have turned deeply pessimistic on sterling’s outlook.
One-month sterling risk reversals GBP1MRR=, an indicator of investor views on the currency’s short-term direction, are now at their lowest levels since September 2016.
The lower risk-reversal prices trade at the more investors are demanding put options - which give investors the right to sell the pound at a future date - over call options, which give investors the right to buy.
That signals that investors are preparing for more sterling weakness by either betting on more downside or buying protection should the currency take another leg lower.
That rush to protect portfolios is also reflected in market expectations of swings in the price of the pound between now and the end of 2018.
One-month implied volatility gauges have spiked to their highest levels since July 2016. At over 15 percent, one-month volatility has entered territory normally reserved for emerging market currencies. Indeed, one-month volatility is now trading higher than that of the Brazilian real.
“I’m just trying to keep track of what’s going on and it is like watching the car crash unfold in front of us,” said David Keir, Edinburgh-based co-manager of the TB Saracen Global Income and Growth Fund.
“It clearly feels like maximum uncertainty at the moment.”
All options are on the table as May fights for survival, including the possibility of a UK general election or a second Brexit referendum.
Investors appear most concerned about the next few weeks - one-month options that help protect portfolios between now and mid-December are trading at their biggest premium over 12-month options in more than two years.
The market remains heavily short on the pound, and investors are well aware that any glimmer of a breakthrough could trigger a massive relief rally.
Hedge funds deeply pessimistic on the currency have been caught out when Brexit negotiations take a sudden turn for the better.
Didier Saint-Georges, who helps manage more than 50 billion euros (£44.4 billion) at Carmignac Gestion, says investors should avoid direct exposure to the currency if they can.
“It could really go a big way in both directions,” he told the Reuters 2019 Investment Outlook Summit.
So, market situation and volatility shows that investors nervous. Indeed, GBP stands net short, but last week data shows that net position has been contracted. Even hedgers reduced their exposure to downside risk by closing small part of long position and opened 10+K contracts in opposite direction. It seems that bearish pressure has become lighter last week:
Source: cftc.gov
Charting by Investing.com
Although these minor changes do not let us talk on breaking of major long-term tendency, but they could trigger retracement in shorter-term perspective. Let's try to cover this subject by technical analysis.
Technicals
Monthly
Last time we talked about GBP at the end of September. Monthly chart has not changed significantly. As you can see price is coiling around Yearly Pivot 4th month in a row since August. November action stands inside October range. Trend stands bearish here, no oversold. Bearish context here still stands intact. GBP tries to hold above last major 5/8 Fib support area of 1.29.
Long term charts mostly stand in relation to fundamental processes rather some technical short-term issues. From this point of view GBP action on monthly chart absolutely corresponds to our view on UK economy and its perspectives. Once our previous target of YPP has been completed at 1.30 area, now we could talk about YPS1 at 1.2440.
At the same time we remind you our long tong all-time AB=CD OP target around 0.95. Recent bottom of 1.22 is, actually, COP target.
GBP is unique currency. It is driven by political events more than any other currency. Investors now even rare talk on statistics and economy factors. Policy stands in focus. And the most important driving factor of course is relation with EU as economical as political. UK is an island, and it strongly depends on its closest neighbor - EU. Not only in terms of mutual trading, but also in terms of goods logistic. If this flaw will start to wide - 0.95 of GBP/USD could become a reality. In fact, our long-term OP level stands not as doom, but as indicator of worse scenario, if it will be realized.
Despite loud self-congratulatory in media - in reality nothing has changed. UK pays contributions to Brussels, UK has no customs border, UK stays under EU tax and customs law - all this stuff till 2020 but it can't take part in adjustments of this law. What has been changed, what T. May has agreed with EU? I don't understand, only term - 2020 maybe.
Finally, pivot framework looks very bright here. Cable has failed to break through Yearly Pivot resistance 1. This fact tells, that upside action to 1.40 was just a retracement within long-term bear trend, and this retracement is over. Following this logic, current downward action is another leg of bear trend.
Based on monthly picture, we could suggest that downside action has more chances to happen rather than not to happen. At least currently there are no signs here that give at least minor hint on possible reversal.
But in shorter-term perspective, some fluctuations inside November range are possible.
Weekly
Technically, GBP here, on weekly, shows very comfortable situation. The story stands around the lows, guys. While these lows stand - cable keeps chances on upside action. Once price will break it - downside action will continue. This is due some reasons. First is, as we've said - GBP at major 5/8 Fib support. If price will break it - no barriers are below it.
Second, in fact, here we have bullish grabber and it suggests action above 1.3170 area within few weeks. This pattern also is valid until price stands above its low. It means that any bull trade that we could try to take here are based on the lows and should be taken against them. This makes overall situation simple to control. In fact for trading and position taking we need the range of last week only.
Still, on broader view, we already have talked about it - COP target of large AB-CD pattern stands at 1.25 - right below the market. Despite that this could lead to appearing of butterfly pattern - it makes any long-term bullish trade more risky.
Daily
Here we have "222" Buy in place, as GBP has completed AB=CD pattern well. Also price has hit daily oversold area and it should support it for awhile. Negative sign - too fast drop on CD leg. In fact, CD leg is just one nasty candle down.
Intraday
On 4H chart we see nothing special, except strong 1.29 resistance area. Since bullish setup has solid flaws - major task for those traders who intends to go long is to take position as closer to the lows as possible. It means that the deeper retracement on intraday charts you could catch all the better, especially if it also will take the shape of some bullish pattern:
For example on 1H chart, as market has completed minor AB-CD pattern, retracement has started. Previous bearish momentum is strong, so it is logical to watch for AB-CD retracement. First it is close to the lows, but It also could give us "222" Buy pattern.
But, for the sake of fairness, it is worth noting that bullish scenario is weak and it would be better to not count on real upside reversal. Upside AB=CD on 4H chart is possible, but not more, at least now. Overall action doesn't show signs of thrust, it is rather gradual, but real reversal demands impulse.
If you're looking for short-entry, it is better to wait a bit because market at oversold and grabber on weekly chart is still valid. Upside retracement definitely gives better entry price and we also could get "222" Sell on 4H chart. Only if it will be clear that lows will be taken, short position will make sense.
Conclusion:
Short-term situation on GBP stands as compressed spring. Although longer-term view still looks bearish, it doesn't mean that on coming week GBP can't show upside retracement. Major indicator of sentiment is recent lows. Pullback is possible until they stand. Thus, bull traders could try to buy against them as closer to the lows as it will be possible, while bears are better to wait a bit, since market stands rather close to oversold and better opportunity will appear sooner rather than later.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
