The British Pound (GBP) rallied yesterday to a four-week high of $1.24, after strong support around the major group of fixing points in the FTSE 100 index. The bullish signal from this strength of support has sent the pound trading higher, while the downside break is well known to investors and analysts. But what can you make of the latest news, which suggests that a weak base is developing around the three major fixings in the FTSE 100?
Those points represent the following:
The Index starts to pick up from the lows from the end of February (around £110) to the middle of March (around £120). After each of these key points, a weakness in the GBP/USD (or even a “washout”) is common in the days following.
Here’s why the FTSE is important: it keeps a close eye on the outlook for equities in the “big 4” UK companies. Since the index acts as a gauge of the health of the market, the current weakness in the GBP/USD will likely raise concerns among the participants in the market that any change in the outlook for the market could affect the outlook for the index.
In general, when there is a low point in the index, it looks like the higher-performing indexes are going to win. It’s not difficult to understand why they would want to keep a close eye on the index.
It looks like the FTSE index is starting to pick up a little bit. What we see is a weakness forming around the major groups of fixing points in the FTSE 100 (which I identified in my previous piece).
This shows that the Index will be relatively strong through the next five years or so, after the FTSE rises from its current level. This shows that the recovery is being driven by the fundamentals, which are strong.
The strength of the Index will help the FTSE to sustain its strength over the next five years or so. Once it picks up in strength, it’s going to be hard for the Index to lose its footing.
Because of the strength of the FTSE index, the Pound has been able to rally in response to the strengthening of the Pound against the Dollar. As long as the Index and the Pound are trading at their strongest levels, the FTSE index will be stable, giving confidence to the major financial institutions in the FTSE index.
As we have already noted, the recent weakness in the British Pound (GBP) has been widely expected by market participants. But the strength of the index can give us some useful information about the strength of the underlying economic strength.
And we know that the top financial institutions, like the Bank of England, the Bank of International Settlements, and the IMF, are watching the situation very closely. If they see a strengthening of the FTSE index, they are very likely to intervene in the market to boost the value of the British Pound.
The latest news suggests that the weaknesses in the market are gradually fading. A strong indicator for the future strength of the British Pound, then.