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FTSE 100: Further Strength at the Expense of Sterling

FTSE 100: Further Strength at the Expense of Sterling

What’s inside:

  • The FTSE 100 is attempting to break to new highs towards the measured move target of 7185
  • Pound weakness acting a strong catalyst for the index
  • Channel since the middle of September seen as a good guide for longs

On Wednesday, when we last discussed the FTSE, it had come within less than a point of breaking the April 2015 high at 7122.7. A solid push through this level should see the index on its way to the measured move target we penciled in at ~7185; this target was determined by adding the depth of the inverse head-and-shoulders pattern to the price of the neckline.

Sterling weakness continues to act as a major boon, given the majority of the companies which make up the FTSE 100 generate a lion’s share of their profits outside the borders of the UK. This leaves these multi-national corporations in position to benefit when converting profits denominated in foreign currency back into pounds. The 3-month correlation between GBPUSD and the FTSE is currently at a strongly negative 82%.

The recent ‘flash crash’ in the pound has muddied the waters, making analysis on the currency more difficult. However, it’s not necessary to understand fully what is going on with the currency to make decisions on the FTSE, but price fluctuations are certainly worth bearing in mind, especially given how extreme the situation has become on the currency side of the relationship.

Getting back to the chart of the FTSE…

The FTSE is closing in on 7185, our measured move target (MMT). This projected target doesn’t mean the index will necessarily stop there (or even reach it), but utilizing MMTs is a good way of determining targets for classic technical patterns. The price advance since the middle of September has been orderly, and such it has created a channel from which to operate from. Stay within, then the FTSE will remain pointed higher, but should it fall below the lower parallel, then at the least we will need to turn cautious on longs. (GBP will have likely turned, too.)

FTSE 100: Daily

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---Written by Paul Robinson, Market Analyst

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