Trading GBP/USD and the FTSE 100 during the latest Brexit updates

Whether it's orderly or disorderly, in agreement or disputed, volatility strategies have outperformed and the upside movement has aided retail longs significantly.

Brexit Source: Bloomberg

Factors keeping the pound volatile

The pound was the top performer amongst the forex majors last week and by a healthy margin, only for those gains to be called into question at the start of this week as the Brexit deal agreed upon between the UK and the EU on Thursday in Brussels was met with uncertainty following Saturday’s rare UK parliament session, the result of which was not a direct yes or no vote but a vote on Letwin’s amendment that passed 322-306 to withhold lawmakers’ approval of the Brexit deal until after legislation required to implement it has been cleared. That legislation could take weeks to sort out, and worse still, could open up terms of the UK’s exit from the EU. Saturday’s decision forced the UK prime minister into requesting a Brexit delay as required by a parliament law passed last month in the absence of an agreement over the weekend, and the letter (or three letters) have been delivered.

The European Council’s president Donald Tusk will now need to ‘start consulting EU leaders on how to react’ though the likeliest scenario is to agree to an extension until the end of January 2020. This doesn’t mean it can’t occur sooner than the expected-to-be-agreed-upon new deadline, but it’ll be a slower-paced movement that will depend on the speed of getting legislature passed. There’s also a question of whether a debate (and vote) will be held on Monday in the House of Commons, though that’ll depend on its speaker. More clarification on the EU’s acceptance of the delay is expected this week with a possible emergency summit convened amongst EU leaders to agree to postpone Brexit. From the EU’s standpoint, any chance of a deal is preferred to a no deal scenario.

Pound retail and institutional sentiment

While volatility has a tendency to punish range-traders when pivot points fail to hold as the market shifts to a new range, in GBP/USD’s case, it aided retail longs significantly. Charted below on the GBP/USD weekly chart in the blue dotted line is retail sentiment as % long, and having reached 80%+ levels, that bias has dropped to a slight majority long 53% at the start of this week on heavy long profit-taking and short initiation. In the FTSE 100, IG’s very own retail bias is at a heavy long 70%.

On the institutional side, the Commodity Futures Trading Commission’s (CFTC) latest Commitment of Traders (CoT) report shows the bias amongst larger speculative traders remaining in extreme short territories at 79% (ie only 21% long) and is plotted in the green dotted line below. No figures are available for the FTSE 100, though they remain heavy to extreme long in US indices Dow Jones and Nasdaq.

GBP/USD’s weekly and daily chart technical outlook

From a technical standpoint, both daily and weekly outlooks are volatile. On the daily, all its main technical indicators are flashing green, and where its average directional index (ADX) is showing an ongoing propensity to trend. On the weekly, more indicators are turning bullish following its price breaching its 50-week moving average last week. The positive technical bias has been formed on the back of fundamental news and would as a result be open to retracement.

Conformist strategies include breakout strategies anticipating a breach of the first resistance level and/or break of the first support levels, while those looking to run contrary to the current overview can entertain reversals off the main pivot points, and where fading strategies should be avoided given the likelihood of getting stopped out running contrary to a move in a volatile market, especially if more significant Brexit news is released.

The FTSE 100’s weekly and daily chart technical outlook

While the pound has been experiencing significant volatility, the FTSE 100’s movement has been relatively more sedate and range-bound, finishing lower for the week and undoing the week before’s gains. Both daily and weekly outlook remain consolidatory and where the bulk of their respective indicators are neutral, and with a non-trending ADX on the weekly FTSE 100.

Here, conformist strategies in line with the current consolidatory technical overview involve reversal strategies only after the levels are broken and not running counter to the move (selling the first resistance level of 7250 after it is breached significantly, initiating as it reverses back down, or buying the first support level of 7050 after the level breaks first and initiating as it reverses back up at that level). Those liking a contrarian view can opt to trade breakout strategies, though on a lack of momentum should consider it with limited profit taking.

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