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FTSE Technical Focus – GBP Reaction to BoE May Help or Hurt Rally

FTSE Technical Focus – GBP Reaction to BoE May Help or Hurt Rally

Paul Robinson, Strategist

What’s inside:

  • FTSE bounced hard off big support, put in tiny range trading range yesterday
  • BoE early afternoon GMT time likely to spark some level of volatility out of GBP, to impact footsie in opposite direction
  • Further gains will quickly bring into focus staunch resistance in vicinity of 7550/600

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Today, at 12 GMT we have the BoE rate announcement, with the central bank expected to hold rates at 0.50% and make no other adjustments to the current policy. This is likely to bring a tame reaction by the market, but there is always room for volatility on commentary by Governor Carney and crew. (For live coverage of the announcement, join Martin Essex at 11:45 GMT time.)

Any sizable volatility in GBP will almost certainly be felt in the FTSE 100 in opposite fashion, given it primarily consists of multi-national companies who operate outside of the UK. What’s good for the pound is bad for the footsie and vice versa due to currency impact on corporate profits when they are repatriated. The correlation between GBP and the FTSE 100 is a strongly negative 64% over the past two weeks, and even if it weren’t this strong in the near-term, the longer-run correlation is negative enough that a strong event-driven move in the pound will likely be felt in the footsie.

Turning to the FTSE chart, a continued drive higher from here will soon bring the 7550/600 area into focus. It’s been an area of staunch resistance since the tail-end of May on several occasions, most recently the market made a strong turn lower early last month. If we see an extension from here, given how far the index will have come from just under 7300 in a relatively short period of time, the first test may find it a bit of a struggle to push on through with the footsie short-term overbought. But should a run into resistance and not find forceful opposition, a push to new record highs may be just around the bend.

Looking lower, 7470 is the first level of short-term support followed by the 200-day MA at 7403. A decline beyond there would bring into question the recent surge and the Feb ’16 trend-line, along with attention once again placed on big support surrounding 7300.

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FTSE: Daily

FTSE daily price chart with correlation to GBP

---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.

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