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FTSE: Strong Sterling Reaction on BoE May be Needed to Break It Free

FTSE: Strong Sterling Reaction on BoE May be Needed to Break It Free

Paul Robinson,

What’s inside:

  • FTSE 7550-ish continues to be problematic for upside momentum
  • 7430-ish providing good support for now
  • Strong reaction in sterling on BoE may be needed to break either side

Find out in the DailyFX Q4 Forecasts what we expect to drive the FTSE & Pound into Year-end.

The FTSE was seeking resolution last week when it got jammed up between the area around 7550 and the February 2016 trend-line. The gridlock was broken on Wednesday, but the market quickly found support in a region around 7430 and has the footsie looking at another set of levels (albeit it wider now) to contend with before possibly finding some momentum one-way or another. Resistance is clearly defined as 7550/65, support 7430ish.

To trade higher, a clean close will need to develop above the 7550/65 region, which will also constitute yet another recapture of the Feb ’16 trend-line. At that point we could reasonably expect the market to move to the June intra-day high at 7599 and better. A clean close below ~~7430 will likely bring the 200-day MA into play, with the next sturdy price support clocking in around the 7310/290 region.

The FTSE 100 is mostly comprised of multi-national companies, and as such its performance is impacted by strong fluctuations in the pound. Corporate profits as they are repatriated back into the UK receive a boost from the conversion from a stronger currency to a weaker pound, and conversely the opposite effect when the pound strengthens. Since ‘Brexit’ the inverse correlation on a rolling 3-month basis has been diminishing but still stands at nearly -30%. Even though currency impact is generally weakening, important events which push around the currency are still very likely to lead to strong moves in the 100-index.

We have ‘Super Thursday’ coming up, where the BoE is expected to raise rates to 0.50% from a record low 0.25%. The quarterly inflation report will be released as well. Look for a large move out of sterling to either boost or sink stocks and push the FTSE above or below the aforementioned levels. If not, a range could develop yet again.

Check out these tips for Building Confidence in Trading.

FTSE: Daily

---Written by Paul Robinson, Market Analyst

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You can follow Paul on Twitter at @PaulRobinonFX.

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