Daily Brexit update: Risk off contain for now, watch the USD/JPY support at 108.10

Watch the USD/JPY & Nikkei 225 parallel supports at 108.10 & 19800

U.K. PM May’s Brexit plan was rejected significantly by the U.K. Parliament in a landslide margin of 230 votes. The opposition Labour party had put down a motion of no confidence in PM May’s government and parliament will debate and vote on it today, 16 Jan evening (U.K. time).

Media reports have indicated that PM May is likely to survive the no confidence vote as political ally, the Northern Ireland’s Democratic Unionist Party will support May. The GBP/USD has managed to reverse its initial losses from its 1.2668 intraday low to print a high of 1.2890 before the close of yesterday, 15 Jan U.S. session. Despite its swift rebound seen in the aftermath of the voting results, the GBP/USD has remained below the 1.3000 key pivotal resistance. Click here for the details on the short-term technical analysis outlook report published yesterday.

The recovery seen in GBP/USD has suggested that market participants are painting an optimistic picture that there will be an extension of the Brexit deadline from 29 Mar 2019 and even the possibility of EU softening their stance in the next round of negotiation on the Irish border backstop.

For now, there is no major risk off movement being spilled over to global risk assets and a good “risk off indicator” proxy to watch will be the USD/JPY as illustrated below from its technical analysis charts.




  • Since the recent flash crash low of 104.70 printed on 03 Jan 2019, the USD/JPY has started to evolve within a minor “triangle range” configuration with upper/resistance and lower/support limits at 108.95 and 108.10 respectively.
  • The shorter-term 1-hour Stochastic oscillator of the USD/JPY has started to inch down from its overbought level after a bearish divergence signal which suggests a built-up in short-term downside momentum of price action
  • Interestingly, the Nikkei 225 which tends to have a significant direct correlation movement with the USD/JPY has traced a similar minor triangle-liked range configuration in place since 26 Dec 2018 low. In addition, the range configuration of the Nikkei 225 has transformed into a bearish “Ascending Wedge” which indicates that the rate of change of the “higher highs” is lower than the corresponding rate of change of the “higher lows” that has formed since 26 Dec 2018. The “Ascending Wedge” support of the Nikkei 225 rests at 19800. These observations suggest that the Nikkei 225’s on-going range configuration has evolved into a more “negative form” versus the range configuration seen in the USD/JPY.

Conclusion

Therefore, it will be important for traders to monitor the movement of these two asset classes (USD/JPY & Nikkei 225) to have a gauge on changes in risk appetite. The parallel supports to watch will be 108.30 on the USD/JPY and 19800 on the Nikkei 225. A break below these levels is likely to see at least a near-term risk off/aversion scenario for the USD/JPY to retest the 03 Jan 2018 swing low area of 107.70 with a potential decline for the Nikkei 225 towards 18970 swing low area of 26 Dec 2018.

Charts are from City Index & eSignal



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