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 Tuesday 21 November 2017

The UK100 and sterling - PM Bulletin



Here are a few levels to watch out for should markets move on the UK Budget Statement

I was going to write about tomorrow’s UK Autumn Statement from Chancellor Hammond and how it may affect financial markets - specifically sterling and gilts. But the more I read about it the more depressed I became. In addition, it’s a decent rule of thumb that attempting to make worthwhile forecasts about the budget, let alone the likely market reaction, is nothing more than a Fool’s Errand. So, rather than make myself look like even more of an idiot than I usually do I’m going to swerve it entirely.

Instead I want to look at a couple of charts from a technical perspective, the UK100 and GBPUSD. Whatever happens in tomorrow’s budget, these are markets that serve as a useful measure of what the City thinks about Spreadsheet Phil’s fiscal shenanigans. I thought it is worthwhile highlighting any significant areas of support and resistance which could prove useful going forward.

Before that it’s worth considering the perceived correlation between sterling and the UK100. Market analysts (me included) often remark on the negative correlation between sterling and the index of the top 100 UK shares. The reason cited is that around 75% of corporate earnings of stocks in the UK100 come from overseas, and in a different currency. This means that when the British pound rises, UK manufactured goods are more expensive for overseas customers which depresses sales. It also means that profits are lower when converted from euros or dollars or whatever, back into pounds and pence. This post hoc explanation has been particularly prevalent since the UK’s referendum on EU membership back in June 2016, and while this effect is quite evident on a short-term basis, it doesn’t really hold over time. On any one day it’s quite common to see a fall in sterling correspond to strength in the FTSE100, and vice versa. However, that’s really little more than a knee-jerk trader reaction when there’s nothing else driving the market. Put something else into the mix and the inverse correlation is quite weak. We can see this from looking at charts of the UK100 and GBPUSD going back to early 2016. As we can see, both the UK100 and GBPUSD have made decent gains since early October 2016 when sterling suffered a “flash crash” in Asian Pacific trade.

In terms of areas of support and resistance, I’ve kept it simple. The UK100 is currently trading in a wide range with 7,600 at the top and 7,300 at the bottom. The index is currently trading around the 7,400 mark and it looks unlikely that it will trouble either support or resistance tomorrow afternoon, but who knows?


But the price movements on cable have become more and more compressed. There’s an upward-sloping trend line that’s held since the beginning of the year (I haven’t included the October “flash crash” low as no one really knows what that is). Support currently comes in around 1.3100 or thereabouts. But what is really interesting is how the currency pair has closed in on resistance around 1.3300 since the beginning of the month. We’ve seen a succession of higher lows and higher highs which suggests that a test of this level is imminent. A breakout above here could lead to a rally ad retest of 1.3600 - the September high and the best level since the Brexit referendum. The only question now is if Spreadsheet Phil is going to provide the catalyst for such a move?



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Posted by David Morrison

Tagged: GBPUSD Brexit CFD FTSE

Category: PM Bulletin

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