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FTSE 100 Weekly Look Ahead: GBP and FTSE Correlation Breaking Down

FTSE 100 Weekly Look Ahead: GBP and FTSE Correlation Breaking Down

2018-08-13 07:00:00
Justin McQueen, Analyst
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FTSE 100 Analysis and News

  • GBP Decline May Begin to Weigh on the FTSE 100
  • UK Data in Focus with Wages (Tue), Inflation (Wed) and Retail Sales (Thu) Scheduled
  • Geopolitical Tensions Presents Risk for FTSE

See our Q3 forecasts to learn what will drive FX the through the quarter.

GBP Decline May Begin to Weigh on the FTSE 100

What has been evident in recent times is that when the Pound drops, the FTSE 100 typically moves in the opposite direction given that roughly 70% of the companies within the index generates revenue from overseas. As such, the fall in GBP tends to support dollar-earning multinational companies. However, the negative correlation has seemingly broken down with the Bank of England recently hiking rates while inflation continues to remain above the central banks 2% target. Consequently, the Pound and the FTSE 100 may move into positive correlation for the first time since December 2016, which would not spell good news for the FTSE 100 as the Pound falls to its lowest level against the greenback since July 2017.

FTSE 100 Weekly Look Ahead: GBP and FTSE Correlation Breaking Down

Source: Thomson Reuters

UK Data in Focus

Focus this week will be on the plethora of economics data points out of the UK, with the jobs report released on Tuesday, while inflation and retail sales are scheduled for Wednesday and Thursday. Much of the markets attention will be placed on the inflation print with risks potentially skewed to the upside given the fall in the Pound, potentially providing a boost to inflation, resulting in a firmer Sterling.

Geopolitical Tensions Presents Risk for FTSE

Geopolitical tensions are on the rise with both Turkish and Russian diplomatic ties with the US deteriorating. Consequently, this has placed pressure on global equities, most notably from concerns out of Turkey after reports from the FT that banks could be exposed to the fall in the Turkish Lira, which is down over 80% YTD. Unless the Turkish authorities look to address the fall in the Lira, weakening sentiment may persist, which in turn could see equities extend lower.

FTSE 100 Price Chart: Daily Time Frame (February-August 2018)

FTSE 100 Weekly Look Ahead: GBP and FTSE Correlation Breaking Down

Chart by IG

A cluster of DMAs have underpinned the FTSE 100 for now, eyes will be on for a break lower, which would open up a potential move in for the 7600 level. On the topside however, near term targets are at 7700 before 7750

KEY TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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