UK markets saw a rather divergent performance yesterday with the FTSE 100 slipping back and in the process dropping into negative territory for the year, while the FTSE 250 rebounded strongly after its losses on Tuesday.
While the recent rally in the pound may well be a factor in the recent weakness it’s far from the only reason given the FTSE 250’s outperformance, and the fact that it’s up 7.5% year to date, while the pound is up 4% against the US dollar, though half of that gain is in this month alone.
Recent weakness in commodity prices has also weighed on the FTSE 100, along with a fall in global bond yields which has hurt financial services stocks, both of which don’t have as big a weighting on the FTSE 250.
In any event, the pound slipped back a touch yesterday after the strong move higher on Tuesday as traders mulled the prospect of whether this week’s move higher was a case of short positions getting squeezed out, or whether it marked a change in sentiment, as the prospect of a longer Brexit time frame raised the prospect of a more gradual transition arrangement, in the event of a big Conservative win on June 8th.
The US dollar enjoyed a welcome respite yesterday after several days of declines as markets repriced the prospects of the number of rate rises in the rest of this year. The rebound was also helped by comments from US Treasury Secretary Steve Mnuchin that President Trump wasn’t looking to talk the US dollar lower when he stated last week that the US dollar was too strong.
Nonetheless markets are realising that the ambitious reflation expectations that we had at the beginning of this year are starting to get reassessed in the context of the ability of the new US administration to deliver anything meaningful on either tax reform or increased infrastructure spending over the next few months.
Oil prices slid further yesterday, helping drag US markets lower, after US inventory data came in as expected and reinforcing the recent resilience of US stockpiles. A surprise build in gasoline inventories also raised the prospect that weak demand for oil by-products is likely to remain as a headwind to reducing stockpiles in spite of the OPEC’s desire to cut inventory and reduce supply.
The continued rise in US rig counts and US production, as well as the slow progress in getting inventories lower is likely to raise the tensions within OPEC about the effectiveness of the production quotas and cuts agreed since the end of last year.
EURUSD – continues to be capped near the 1.0750 level, though a break has the potential to push up towards the 1.0850 area and March peaks. The uptrend from the January lows remains intact while above the 1.0600 level.
GBPUSD – the pound ran out of steam just above 1.2900 yesterday before slipping back. Upside momentum towards 1.3000 and 1.3300 remains intact while above the 200 day MA as well as the break of its triangular consolidation at 1.2600.
EURGBP – key support currently lies just above the lows this week and last December at the 0.8300 level. Until we get a move below here the potential for a short squeeze back to the 0.8450 area remains high. A move below 0.8300 has the potential to open up a move towards 0.8000 initially. A recovery back through the 0.8450 level is needed to stabilise.
USDJPY – the 108.00 level and the 200 day MA is holding for now but we need to break back above the 110.20 area to stabilise. Initial resistance comes in at the 109.40 area for the current rebound. A break of the 108.00 level could well trigger losses towards the 105.00 level quite quickly.
FTSE 100 is expected to open 2 points lower at 7,112
DAX is expected to open 28 points lower at 11,988
CAC40 is expected to open 13 points lower at 4,990
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