It had all been looking so good for the UK stock market with a strong move higher at the start of the year seeing the FTSE 100 move up in uncharted territory and post a series of record peaks. However, a recent surge in the Pound has acted like a millstone around its neck and put paid to the upside momentum and the benchmark now trades at a lower level than where it began 2018.
GBPUSD tags 1.43
The most obvious place to see the recent jump in Sterling is against the US dollar with the market rising to yet another post-Brexit vote high above 1.43 this morning. Whilst the gain of nearly 800 pips (roughly 6%) in the last fortnight is largely down to a deterioration of the Buck the Pound has also played its part with the Sterling/Euro rate hitting a 7-month high today ahead of the highly anticipated ECB meeting. The FTSE 100 is one of the most sensitive of all large stock markets to domestic currency effects, as was seen in the rapid recovery following the panic selling in June 2016 on the EU referendum outcome, and the rise in the Pound is becoming an ever greater headwind to further gains for stocks.
Draghi to talk down the Euro?
The main event today is the conclusion of the latest monetary policy meeting of the ECB’s Governing Council, which is widely expected to keep all rates and asset purchases unchanged. From a market perspective the press conference with President Draghi shortly after the rate announcement could well have the biggest impact with traders on tenterhooks looking for any mention of a lack of pick-up in inflation or the latest Euro strength. The single currency has hit its highest level against the US dollar in more than 3 years today, and Draghi may look to take this opportunity to attempt to talk it back down. Given the stubbornness of inflation to return back close to the 2% target there isn’t too much pressure on the ECB to withdraw from its Asset Purchase Programme (APP) in a hurry and the recent rise in the EURUSD could in fact impart further downward pressure on prices and therefore subdue inflation further.