FTSE 100 closing in on record high

Last week was another “risk-on” one for the markets, even though global economic data was poor. Disappointing data did however underline expectations of continued ultra-accommodative monetary policy from global central banks. This underlying theme remains valid at the start of this week.

data did however underline expectations of continued ultra-accommodative monetary policy from global central banks. This underlying theme remains valid at the start of this week. Consequently, benchmark government bond yields have slumped to new record lows for example in the UK and higher-yielding equity markets are rallying to new unchartered territories in the US. In the UK, the FTSE 100 has closed at its best level since June last year. In other financial markets, crude oil prices are higher after chalking up solid two week gains amid short-covering; the Dollar Index is a touch weaker after it fell half a per cent last week and gold is essentially flat as the weaker dollar offsets the impact of rising equity prices.  

The trend of weaker data has continued in this early part of the new week. Japan’s GDP for the second quarter came in flat overnight when the market was expecting to see a 0.2% expansion while the US Empire State Manufacturing Index has printed a disappointing reading of -4.2 for August today. The rest of Monday’s session is going to be quiet as far as data is concerned but then things should pick up from Tuesday onwards. In fact, Tuesday will be a particularly busy day with the focus being on the Consumer Price Index measure of inflation in both the UK and US. The UK CPI is expected to have remained unchanged at 0.5% in a year-over-year basis in July. The pound could drop sharply against the US dollar should it disappoint those expectations or if the US CPI turns out to be above the expected flat month-over-month reading. Tuesday’s other important data from the world’s largest economy include industrial production, capacity utilization, building permits and housing starts. So, one should expect to see a volatile day for the US dollar.

The FTSE, already among the top performing stock indices out there due to the Bank of England’s re-introduction of QE, could benefit further from potential weakness in the UK data as this would encourage the BoE to remain uber-dovish for longer. Indeed, the UK benchmark stock index has been virtually on a tear since the initial wobble post the Brexit vote. It is now not too far off the psychological level of 7000 or its prior record high of 7122 achieved in April 2015. But potentially rally could go far beyond those levels, with the projected target of the recent inverse head and shoulders pattern being at 7360 and the 127.2% Fibonacci extension of the move down from the prior record high residing at 7565. These are among our short-to-medium term bullish targets.

But the rally is beginning to look a bit stretched although a pause here, if seen, may not necessarily be a bad thing. The RSI has moved above the “overbought” threshold of 70, although it is yet to reach the extreme levels of 80 and beyond. Even if we do get a pullback, there are so many short-term support levels that could help to limit the downside, including the recently broken resistance levels such as 6870, 6780 and 6615. The long-term key support is the neckline of the inverse head and shoulders pattern at 6430. It might be a while until some of these levels are revisited again, as we believe a bullish breakout to new all-time highs is a more likely outcome than a sharp sell-off, even at these elevated levels. 

Source: eSignal and FOREX.com. Please note, this product is not available for our US customers.

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account