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Theresa May has a difficult task on her hands and possibly, this is the last chance for her. EU has already agreed to her Brexit text, but the major obstacle is still there

It was another long night for the United Kingdom’s prime minister, Theresa May. Divorces are never an easy task. U.K. leaving the European Union is the type of divorce that is going to have an impact on millions of lives. After the 2016 Brexit referendum, the U.K. decided to leave the European Union and since then Theresa May has been working hard to strike a deal with the E.U. Perhaps, this has been the most arduous task in her career and one needs to applaud the fact that she is determined to deliver on it.

On Monday night, she stayed up all night to reach a deal with the E.U. This month is crucial for striking a deal. She only has two days if she wants this all wrapped and sealed off by a special E.U. summit this month. She thinks that the proposed “backstop” would resolve the Irish border issue. However, this has failed to impress her party members. Not many are on board. This is because, pro-Brexit Tories (Theresa May’s party) think that this is nothing but a trap, which the U.K will not be able to escape from without permission from the E.U.

In recent developments, U.K and EU have agreed on Brexit text. Theresa May would have to convenience the Cabinet today that this is the best deal that the UK can get, not that this is the best deal she can get. The fact is that these two are very different things, if the idea is; this is the best deal she can get, then the slogans of "a dead woman walking" would come back to hunt her.

This is perhaps the prime minister’s last chance. If she doesn’t make it, this could create another major setback for the U.K. and for her career.

What Is The Trade?

Given the intensity and time sensitivity of the current turmoil, one should be ready to take a position on the back of this event. The currency space is particularly interesting. Sterling has been under major pressure since the 2016 Brexit referendum, it broke the critical level of 1.30 on the against the dollar November 11th, 2018 but it is back above the 1.30 mark again (at least for now). Clearly, panic is pushing the price lower and it is important to keep in mind that when blood is in the street. It is the best time to look for an opportunity in terms of investment.

Given the circumstances, a major move is on the horizon. It is important to be on the right side of the trade or at least be prepared, to accept the losses quick enough to change the direction of the trade. Looking at the pound-dollar quarterly percent change chart below, there have been only a few instances when the prices moved significantly.

The CFTC recent data released on November 11th, 2018 confirms that speculators have reduced their net short positions since September. This indicates that the hedge funds are holding a bullish view on the currency. That would only be because they expect the U.K to strike a deal with the E.U. If a deal is achieved, chances are that the price of the sterling-dollar pair could target the 1.40 level in the longer term. That would be nearly +7% move from its current price which isn’t something unheard of if you look at the above chart.

However, if there is no deal, then sterling-dollar is not only likely to break below 1.25, but the move could extend the sell-off toward the 1.23 mark, a level not seen since April 2017.

Summary

We think the next 24-48 hours are immensely important for the sterling-dollar pair and a huge move is strongly on the cards. One should be ready for this event because history could repeat itself. In other words, we are expecting at least 3-5% upward or downward move for the pair.

Cable trades returns below 1.30 handle in early European trading but still holding positive tone following Tuesday's strong UK earnings data and renewed Brexit optimism. The UK and EU agreed a preliminary text of Brexit deal, which could help the UK to avoid chaotic scenario on no-deal divorce. The document hasn't been published yet and there is still long way towards its implementation, as the document needs to get an approval from the parliament. UK PM May's senior members of the cabinet are likely to back the agreement, but it may lack support from the opposition parties, which could further increase volatility. Strong rally on Tuesday generated bullish signal on formation of bullish outside day pattern, but failed to confirm continuation after bulls penetrated daily cloud but were strongly rejected on approach to cloud top (1.3055), with subsequent pullback resulting in daily close just below cloud base (1.2980). Similar scenario was seen in Asian / early European trading, as thick daily cloud (1.2980/1.3046) proves to be strong obstacle, reinforced by plethora of daily MA's within 1.3000/24 zone). Daily techs are mixed (MA's remain in bearish configuration while momentum continues to strengthen bounces from oversold zone border. The pair is looking for a catalyst to provide fresh direction signal after bulls showed strong signs of fatigue. UK CPI data could boost pound on upbeat Oct figures (Oct CPI m/m 0.2% f/c vs 0.1% prev/Oct CPI y/y 2.5% f/c vs 2.4% prev), however, focus remains on news from Brexit talks, which remain key driver of the British pound. The pair could jump towards last week's peak at 1.3174 if new proposal passes the parliament and gets supported by all political factors in the UK, while negative scenario on repeated talks' stall could risk fresh weakness towards strong supports in 1.2700 zone.

Res: 1.2980, 1.3000, 1.3046, 1.3092
Sup: 1.2949, 1.2935, 1.2883, 1.2838

The EUR/USD has bounced from M L3 Camarilla & 0/8 MM confluence zone to test 1.1300 major order block. The pair is at the crossroads.

1.1300 is the major decision zone for the EUR/USD. Based on IP patterns and technical research, this is either make it or break it. Sustained rally above 1.1300 will target 61.8 fibonacci, 5/8 MM, W H3 zone 1.1380-1.1400. A rejection from 1.1290-1.1300 should make a retest of 1.1242 followed by 1.1216.

Here are the latest developments in global markets:

FOREX: The dollar index is lower by 0.2% on Wednesday, extending its losses from the previous session, which came mostly due to a recovery in the pound and euro. Sterling in particular soared after the EU and UK were reported to have reached a Brexit deal. Elsewhere, the loonie touched a fresh four-month low versus the dollar amid collapsing oil prices.

STOCKS: The Dow Jones (-0.40%) and the S&P 500 (-0.15%) closed slightly lower on Tuesday, as optimism that the US and China would restart trade talks was eclipsed by losses in energy stocks, amid a massive selloff in crude prices. The Nasdaq Composite was flat. Asia was mixed on Wednesday, with Japan's Nikkei 225 (+0.16%) and Topix (+0.17%) closing with modest gains, but the Hang Seng in Hong Kong drifting lower (-0.54%). In Europe, futures tracking the major indices are pointing to a lower open today despite the breakthrough in the Brexit talks, with losses being led by the energy sector.

COMMODITIES: Oil collapsed on Tuesday, with WTI falling by a little over 7% to settle near $55.50 per barrel, and Brent diving by around 6.5% to stabilize near $65.30 a barrel. The losses came amid growing concerns for excess supply coupled with uncertainties around demand, as OPEC revised down its forecasts for global demand growth yesterday. The cartel also said non-OPEC supply growth is set to rise faster than world demand growth. That said, considering the magnitude of the plunge, and the fact that these forecasts make OPEC more likely to take action to support prices, one wonders whether the recent rout may have gone too far. In precious metals, gold is flat at $1,200 per ounce today, trading sideways despite the pullback in the dollar.

Major movers: Pound soars on Brexit deal, but real battle to be fought in Parliament

EU and UK negotiators reached a draft Brexit deal on Tuesday, which reportedly guarantees there will be no physical checks, i.e. a “hard border”, between Northern Ireland and the Republic of Ireland. The details of the accord have not been made public yet, and UK PM Theresa May is scheduled to present them to her Cabinet today at 1400 GMT for approval. Assuming the senior ministers sign on, then the agreement will be put before the UK Parliament for a vote. The pound liked the news, advancing across the board as speculators likely unwound or covered several of their prior bearish bets on the currency.

One shouldn't get carried away with optimism though, as reports suggest the UK Cabinet is highly skeptical of the deal. Even if it gets the Cabinet's endorsement, the key issue will be whether it can pass Parliament, as several lawmakers already said they will most likely vote against it. The opposition Labour party, the DUP, and Brexiteers including the likes of Boris Johnson made it clear they are unlikely to vote in favor. Hence, the “real battle” will probably be fought in the House of Commons, and given how unhappy most lawmakers already seem without even having read the details of the deal, it wouldn't be a surprise to see sentiment around the pound sour again before long.

The euro rose in sympathy to sterling on the Brexit breakthrough, paying little heed to the fact the Italian government resubmitted its budget to the EU without changing its controversial deficit targets. Hence, an EU-Italy clash appears all but imminent, with the real question being whether the Commission will go as far as impose the fines that the rules call for, or whether it will seek a third option to defuse the situation and avoid fueling anti-EU sentiment in Italy.

Elsewhere, risk appetite was on wobbly legs, with US equity indices swinging between gains and losses, to close slightly lower. On the one hand, news the US and China are set to restart trade talks supported sentiment, but massive losses in energy stocks and whispers of forthcoming US tariffs on European autos likely kept a lid on optimism.

Day ahead: US & UK on receiving end of CPI data; revised Q3 GDP due out of eurozone; Brexit, Italy in focus

Wednesday's calendar features inflation data out of the US and the UK, as well as updated growth estimates out of the eurozone. Brexit news, as well as any headlines relating to Italy's budget plans, will also be closely watched.

UK inflation data for October will be made public at 0930 GMT. October's consumer price index (CPI) is expected to grow by 2.5% annually, which would reflect a slight pickup compared to September's 2.4%. A beat in the numbers, in conjunction with more positive momentum on Brexit, could see sterling posting sizeable gains as investors will start pricing in a more aggressive tightening cycle by the Bank of England.

On the Brexit front, Britain and the EU may have agreed on a preliminary exit deal, but still there's room to run as PM May needs to pass this from parliament, something which is not considered an easy task. May will be meeting with her cabinet at 1400 GMT to discuss the draft withdrawal agreement. Any headlines are likely to prove pound-sensitive.

Elsewhere, the nation will also be on the receiving end of data on retail prices (RPI) and factory prices (PPI) at the same time as CPI numbers hit the markets.

Fresh estimates of Q3 GDP growth out of the eurozone will be hitting the markets at 1000 GMT. No revision to the preliminary readings which disappointed is anticipated, with yearly expansion expected to be confirmed at 1.7%, its weakest since Q1 2017. Industrial production prints are due at the same time out of the bloc, with a monthly contraction in output being forecasted.

Brexit – sterling and the euro are highly positively correlated as of late – and Italian developments seem to have much more capacity to move the euro during today's trading, rather than any economic releases.

Out of the US, CPI figures for October are due at 1330 GMT. These do not pertain to the Fed's preferred inflation gauge, that being the core PCE index, though they still have their significance; stronger numbers can stoke speculation for an even more hawkish Fed.

US CPI is predicted to have rebounded after easing in September, rising by 2.5% y/y in October. Core CPI that excludes volatile food and energy items will also be eyed. That's expected to remain constant at September's annual pace of growth of 2.2%.

Of note, Fed Chairman Jerome Powell will be discussing national and global economic issues with Dallas Fed President Robert Kaplan (non-voter in 2018) at an event hosted by the Dallas Fed. Specifically, Powell will be participating in a Q&A session at 2300 GMT. Meanwhile, Fed policymaker Quarles (permanent voter) will be testifying before the House Financial Services Committee (1500 GMT), while the BoE's Ramsden is also on the agenda.

After yesterday's sharp selloff, oil traders will also be keeping an eye on weekly API data on US crude stocks due at 2130 GMT.

Technical Analysis: EURGBP bearish bias in place, trades near 6½-month low

EURGBP is trading less than 50 pips above Tuesday's six-and-a-half-month low of 0.8655. The Tenkan- and Kijun-sen lines are negatively aligned, attesting to the negative short-term bias that is in place. Notice though that the Kijun-sen is moving sideways at the moment which might signal weakening negative momentum.

A UK inflation beat, or more importantly rising optimism for an orderly Brexit, are likely to push the pair down. Support to losses may come around yesterday's low of 0.8655, with steeper losses eyeing 0.8620, the pair's lowest since May 2017. Further below and given a violation of the 0.86 mark, the 0.85 handle would increasingly come within scope.

On the upside and given relatively weak UK numbers or Brexit complications, resistance could occur around the Tenkan-sen at 0.8727; the zone around this captures numerous bottoms from previous months. Higher still, the focus would turn to the region around the Kijun-sen at 0.8797 and then to the 50-day moving average line at 0.8832.

Italian politics – the EU-Italy budget standoff – can also move the pair.

Pivot (invalidation): 2755.00

Our preference Short positions below 2755.00 with targets at 2703.00 & 2671.00 in extension.

Alternative scenario Above 2755.00 look for further upside with 2780.00 & 2815.00 as targets.

Comment A break below 2703.00 would trigger a drop towards 2671.00.

Pivot (invalidation): 11350.00

Our preference Long positions above 11350.00 with targets at 11600.00 & 11650.00 in extension.

Alternative scenario Below 11350.00 look for further downside with 11290.00 & 11205.00 as targets.

Comment The RSI calls for a new upleg.

Pivot (invalidation): 56.85

Our preference Short positions below 56.85 with targets at 54.75 & 53.95 in extension.

Alternative scenario Above 56.85 look for further upside with 57.70 & 58.25 as targets.

Comment The RSI is mixed to bearish.

Pivot (invalidation): 13.9600

Our preference Long positions above 13.9600 with targets at 14.1000 & 14.1900 in extension.

Alternative scenario Below 13.9600 look for further downside with 13.9100 & 13.8300 as targets.

Comment The RSI advocates for further upside.

Pivot (invalidation): 1201.00

Our preference Long positions above 1201.00 with targets at 1207.75 & 1210.00 in extension.

Alternative scenario Below 1201.00 look for further downside with 1199.00 & 1196.00 as targets.

Comment The RSI advocates for further advance.

Pivot (invalidation): 5.4640

Our preference Long positions above 5.4640 with targets at 5.4980 & 5.5170 in extension.

Alternative scenario Below 5.4640 look for further downside with 5.4400 & 5.4100 as targets.

Comment The RSI has just landed on its neutrality area at 50% and is turning up.