GBP/JPY holding territories in 139 handle, despite DUP risks to Brexit draft

GBP/JPY has taken off, rallying over 2% on the day at its highest level so far following reports that a Brexit deal is in the making. GBP/JPY jumped from the lows of 136.45 to a high of 139.31. 

The cross is one of the most volatile major currency crosses and during times such as this, it is not uncommon to see such a variation in the average true range on any given day. However, now, it is whether the cross can sustain its position from both a technical and fundamental basis. 

Fundamentally, the cross has enjoyed a series of upbeat developments on the Brexit front and today's progress and outcome of weeks of negotiations between PM Johnson and EU leaders is the best news the Pound has received in a very long time. The news is sending the currency through the 200-day moving average for the first time since May of this year. 

There had been a series of encouraging headlines of promising discussions between UK PM Johnson and Irish president Varadkar which fuelled optimism of a Brexit resolution in recent days, but today breakthrough is very encouraging. It was revealed that the EU and UK were close to agreeing on a draft Brexit deal, a deal that could be signed and delivered as soon as tomorrow and in time for the EU summit this week. The news sent the Pound on a tear and GBP/JPY subsequently rallied through the 200-day moving average, albeit with a little help from a risk-on environment and a bid in USD/JPY as well which was also en-route towards the 200 DMA today, +0.44% at the time of writing. 

GBP at risk of DUP and UK Parliament

However, the Pound will now be subject to punishment should there be any deviation away from the promising Brexit sentiment – For there is plenty of risk still out there which could pour cold water over such optimism at a drop of a headline.  The Irish border remains a major stumbling block and while there appears to be the potential of a breakthrough, the devil will be in the detail and the draft is going to be dependent on getting support from the DUP if it is to get through Parliament.

Indeed, it is understood that the negotiating teams have agreed in principle that there will be a customs border down the Irish Sea, something of which the prior UK PM May argued as something that no UK PM would ever agree to. The DUP has already warned that the "problem is that the EU and Republic of Ireland see it as a chance to push for more," arguing that the DUP will not back a Brexit deal if Johnson makes more concessions. DUP's leader, Arlene Foster, is to meet with Johnson tonight. Foster says "she will do what's best for the Union" when asked if she will support a deal.

DUP leader, Arlene Foster recent comments:

• Some of the speculation since the UK and Irish prime ministers met last week is vary far off the mark.
• We must remain within the UK customs union, entirely within the UK.
• What we have to see is flexibility from the EU, just as we have shown on single market relations.
• The British PM knows our position.

US/Sino trade relations

Meanwhile, on the Yen side of things, much now depends on US and Sino trade relations and the market's sentiment on global growth – A “partial” US/China trade deal has been agreed but hurdles remain. 

Risk rallied on the news that both sides in the trade war were in rapprochement mode last week and that China had committed to doubling its annual purchase of American agricultural products. The US, in turn, held back from implementing tariff increases scheduled for this week. However, core issues of national security and technology transfer have yet to be thrashed out and China has called for an additional meeting before signing the "Phase 1" deal into ink – So there appears to be a long way to go in this saga yet and the Yen should be buoyed by such risks of a breakdown in relations again. 

GBP/JPY levels

The cross is up tot he 200-DMA, a bullish scenario if the cross can close above it and continue to advance. Risks are that the cross cannot hold here and given the volatility, downside risks will target back to the 21 DMA  in the 133 handle.