Despite stronger UK fundamentals, UK stocks are not moving in the same direction as GBP/USD, trading lower since peaking on 23rd May. Today’s stronger employment data did push price higher, but it is scant consolation as the resultant rally failed to reach the 50% Fib retracement level which price has broken yesterday. Even though a verdict right now may be premature since there is still another half day worth of trading left for the London Stock Exchange, but this assertion may not be wrong considering that immediate reaction to the news was relatively mute, with most of today’s gains primarily due to the gapping up of price during opening hours, suggesting that current rally has more to do with a technical rebound off the mildly rising trendline and confluence with 61.8% Fib retracement then has to do with stronger fundamental data.
Stochastic was en route for a rebound on Monday, but the break of 50.0% Fib pushed Stoch readings lower, resulting in a Stoch/Signal cross within the Oversold region. This is yet another chalk against a bullish reversal from here and puts bears in favor for a retest of 61.8% Fib once again. If the 61.8% Fib breaks, 76.4% Fib will come into focus and subsequently the 100.0% retracement, both of which have their respective historical consolidation area as support.
Fundamentally, it seems that UK Stocks are more affected by global stocks weakness rather than focusing on the positive recovery narrative that is surrounding UK right now. It is debatable whether FTSE or Pound is a better indication of UK’s economic health, but regardless, it is reasonable to think that FTSE stocks will have the higher potential to tank further should economic data starts to turn sour once more. This is not a remote impossibility, as we found out yesterday via a weaker GDP estimate and weaker Manufacturing Output data. UK’s economy is standing on a thin wire that separates between growth and recession. Though general consensus is that the economy has improved, it is clear that UK is certainly not out of the woods. Therefore, expect more negative news to come out sporadically which may drive FTSE100 prices lower, which will make a move back towards 76.4% possible from a fundamental point of view.
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