Both the pound and the FTSE have been rising sharply over the past few days. While some commentators have linked the gains to Brexit, I actually don’t think it has much to do with the B-word, for there is actually growing signs of a deadlock between the UK and EU and time is fast running out for Boris Johnson to seek an extension to the transition period.
A request for an extension needs to be formally lodged by the UK government by the end of June, but an extension is something that Johnson has repeatedly ruled out.
So why is the FTSE and pound both rising?
Well, it is mostly to do with an improving investor sentiment towards risky assets globally. Equities across the world have surged higher form their March lows, and this risk-on trade has benefited foreign currencies including the pound against the US dollar – a safe-haven and reserve currency. Indeed, the pound has been far less impressive against other risk-sensitive currencies such as the Australian dollar and other commodity dollars.
There is no doubt that the biggest driver behind the recovery in global stocks and other risk assets over the past couple of weeks have been the HUGE central bank stimulus and equally impressive government spending programmes.
Sentiment has also improved by signs of economic recovery, albeit from very low bases. Today for example we saw:
- UK Services PMI print 29.0 for May vs. 27.9 expected
- Eurozone Final Services PMI unexpectedly improved to 30.5 from 28.7
- Flash Services PMIs from Spain & Italy better than expected
- Eurozone unemployment rate only edged up to 7.3% vs. 8.2% expected
- But German Unemployment rose by 238K vs 188K expected
Key US data coming up
It will be interesting to observe the upcoming US macro pointers in the afternoon. The ADP report, due for publication at 13:15 BST, will give us a snapshot of the US private sector, non-farm, employment. It is expected to show a 9 million drop in employment compared to 20m the prior month. We will also have the key ISM services PMI at 15:00 BST, which is expected to print 44.2 vs. 41.8 last. Watch out for the employment component as this will provide us with a good clue in so far as Friday’s official jobs report is concerned.
FTSE looking constructive
But focusing back on the FTSE and from a technical point of view, the UK benchmark stock index does look quite constructive, having established a firm base above the 21-day exponential moving average. Recently it had found some resistance around the 6150-6235 area. But this hurdle has now been broken, meaning that future dips back into this area could be defended by the bulls. The next major hurdle is around 6460, which was a former support level and marks the underside of the rising wedge pattern. But for now, the path of least resistance is clearly to the upside, so supports are more likely to be respected than resistance levels.
Source: TradingView and ThinkMarkets