FTSE looking strong as Brexit-hit pound tumbles

As the Brexit-hit pound continues to get a hammering, the FTSE is still going strong despite an otherwise lacklustre day in the stock markets. The GBP/USD broke below the 1.29 handle to reach its lowest level since last August, while the EUR/GBP hit a fresh high for the year at 0.90 and the GBP/JPY dropped below the May low of 143.20, as investors fretted over the prospects of a no-deal Brexit. The weakness of the pound may be the reason why the FTSE is trading higher.  However, the negative correlation between the FTSE and the GBP/USD has become weak in recent times. While these markets have gone the opposite ways today, there is no clear correlation over a one-week and one-month basis. What’s more, the correlation coefficient over a three-month period is a positive 0.50 currently! However, over a six month period, there is a strong negative correlation with a correlation coefficient of -0.85. So, in the short-term outlook, one could conclude that the FTSE and GBP/USD’s negative correlation has broken down. As such, the FTSE’s recent gains are probably because of other factors, not (just) the pound’s weakness – but the latter does still help given today’s price action. Among other factors supporting the FTSE has been a not-so-bad season for company earnings, positive sentiment towards global stocks and the recent oil rally boosting certain UK-listed energy stocks.

From a technical point of view, the FTSE is still looking quite constructive and could be heading to a new record soon. Most recently, it managed to hold its own above short-term support around 7550 after several failed breakdown attempts from the bears. The bulls’ resilience here suggests the index has maintained its bullish bias, even if it hasn’t exactly rallied. Nevertheless, the bullish consolidation has allowed momentum indicators to unwind from extreme levels which means the FTSE is no longer at so called ‘overbought’ levels on popular momentum indicators such as the RSI. If the FTSE can get past the 7780-93 resistance area now then a new all-time high could be hit soon, possibly as early as this week. The previous ATH was at 7903/4. At unchartered territories, there won’t be any prior support or resistance levels for bulls to target. This is where Fibonacci extensions will come particularly useful.  The main one is at 8045, the 127.2% extension of the January-March downswing. Meanwhile short-term support comes in at 7680. Below this level is the most recent low at 7550 formed when the FTSE retested the backside of the triangle’s trend line following its earlier breakout, which held. So, if this 7550 level breaks now then all bets would be off for the bulls, at least until fresh bullish price action is evidenced at lower levels.

Figure 1: