Summary:
- GBP dropping lower after strong recent gains
- UK100 held support above prior breakout zone (7600) last week
- A further pullback in the Pound could boost UK equities
The pound is one of the worst performing currencies in the G10 space today, with sterling sliding against all its major peers. The news flow has been relatively quiet at the start of the week, with a couple of Brexit-related stories having little by the way of an immediate reaction in the FX markets. Claims from the EU that they have taken just 2 minutes to decide their latest negotiating guidelines on Britain’s Brexit transition period – which will basically be an offer of “status quo transition without institutional representation” from March 2019 until the end of 2020 – and comments from UK Brexit minister Davis that he wants minimalist customs agreement after the separation have made headlines but not moved markets.
The UK100 closed lower for a second consecutive week on Friday, with the surge seen in the pound over a similar period weighing on the benchmark. The inverse correlation between sterling and the UK100 was most pronounced in the weeks and months that followed the Brexit vote with a strong recovery in the stock market down in no small part to a near-persistent depreciation of the pound. The final week of 2017 saw a strong push higher in the UK100, with the market breaking out of an 8-month triangle consolidation pattern to move higher into uncharted territory. An all-time high just shy of the 7800 mark was recorded earlier this month before the recent surge higher in the pound saw the market pullback. Despite this decline the price remains above the breakout level of 7600 and whilst this remains the case then further gains could lie ahead.
The UK100 has risen strongly since the Brexit vote in the summer of 2016 and the market remains above the key breakout level of 7600. Source: xStation
One of the main reasons for the pullback over the last fortnight has been a surge in the pound, with the global risk sentiment remaining fairly supportive of stocks – US markets hit record highs just last Friday. The GBPUSD surged up through the 1.3620 level just over 2 weeks ago and barely looked back on the way to making a post-Brexit vote high of 1.4344 last Thursday. The size of the move without much support from any improvement in fundamentals suggest that it could be possibly a little over done and recent D1 candles indicate that pushes higher have been met with selling during the last 2 sessions.
The GBPUSD enjoyed a strong move higher after clearing resistance at 1.3620 but long wicks above recent candles indicate some selling pressure. Source: xStation
The negative impact that the surge in GBPUSD has had on the UK100 can be seen on a H4 chart. The UK100 made its all-time high around the time that the GBPUSD broke above 1.3620 and the strong move higher in cable has coincided with a pullback in the UK100. Note the UK100 axis is inverted to show the inverse nature of this correlation.
The rally in GBPUSD has weighed on the UK100 and seen it pull back from its record high. Source: xStation