FTSE: Strong Sterling Reaction on BoE May be Needed to Break It Free
- 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
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.
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---Written by Paul Robinson, Market Analyst
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