Looming Brexit Risks Fail To Dislodge UK Economic Momentum

Although financial markets are growing increasingly wary of March, especially after UK Prime Minister Theresa May’s repeated insistence that the Article 50 triggering date is rapidly approaching, the economy continues to show surprising energy. Overall, the steep devaluation continues to produce tailwinds for the UK economy as fundamentals like manufacturing, job creation, and inflation are all advancing. Though losing single market access could deal a temporary blow to the economy, the narrative of rapid economic disintegration has not materialized, suggesting that the UK is better poised than ever to reap the rewards of exiting the European Union and striking out on its own.Some of the best evidence comes from the FTSE 100, which notched a new record high earlier in the week.

Outlook Brightening

While it is easy to look upon the Brexit negotiations as fraught with uncertainty and murkiness, especially after the abrupt resignation of Britain’s Ambassador to the European Union Sir Ivan Rogers, there have already been tangible benefits. Even though economic activity faltered right around the referendum vote, it has since mounted a tremendous rebound. The greatest evidence of these tangible gains has been in the arena of construction spending, which bounced from contractionary territory over the summer to the fastest pace of expansion since March during the December reading.Aside from construction and manufacturing, consumers are also feeling upbeat as evidenced by consumer credit growing at 10.80% over the last year, marking the strongest gains since 2005.

Besides consumers playing a key role in the economic bounce, other areas have also witnessed significant improvements including housing, with mortgage approvals climbing in three of the last four reporting periods. Furthermore, during the last six months, unemployment has fallen to an 11-year low of 4.80% while headline inflation is trending near a two-year high of 1.20%. Part of these gains can be attributed to the Bank of England stepping in over the summer to loosen interest rates further and adding £60 billion in quantitative easing. The main beneficiary of these activities has been the rapid ascent of the FTSE 100 equity benchmark, which recently hit a new record on January 3rd.

With UK interest rates hovering at record lows, investors have been clamoring for yields in other places such as equities, fueling a surge higher.In the past twenty sessions, only five have resulted in losses for the benchmark as the ongoing rally faces only limited resistance. The predominant drivers of gains over the last year have been commodity producers that are listed in the index. The massive reversal in industrial metals and energy products specifically have combined to drive certain FTSE 100 components into triple-digit return territory. While the banking sector may be a potential drag in the months ahead, especially if the UK loses single market access, any further decline in the Pound that results from such a move could actually boost equity valuations even further from current levels.

Technically Speaking

On a longer-term basis, the UK FTSE 100 has been trending higher in an equidistant channel formation for the better part of the last 7 years. After bouncing from the depths of the last financial crisis, the index has commonly found support at the lower channel line and resistance at the upper channel line. Bearing this in mind, the pattern implies that a move towards the upper channel line could push the FTSE 100 towards 7500 on the upside if not higher. Bringing the charts down to a more medium-term dynamic, similar bullish technical factors are also emergent. Besides the longer-term channel, a bullish channel has formed since the referendum decision over the summer.Although still shy of the upper channel line, recent accelerated momentum higher does imply the potential for a correction.

(Click on image to enlarge)

Momentum indicators such as the stochastic oscillator and Relative Strength Index are both trending in overbought territory, suggesting the potential for a downside pullback before a resumption of the underlying trend in the FTSE 100. Acting as support are the 50 and 200-day moving averages, the latter of which nearly coincides with the lower channel line. Ideally, any positions initiated near the lower channel line should target the upper channel line. However, the one factor that could see additional upside in the index is the benchmark’s inverse relationship with the Pound. The correlation coefficient between the FTSE 100 and GBPUSD currently stands at -0.8978, establishing that a very strong relationship exists between the two assets. Therefore, any losses in GBPUSD may me mirrored by upside in the equity benchmark.

(Click on image to enlarge)

What Binary Options Traders Should Watch For

As was shown by the correlation coefficient, one of the primary drivers of FTSE 100 momentum higher recent has been losses in the Pound which contributed to relative value in GBP denominated stocks listed in the UK. Should the GBPUSD pair continue to fall over the coming months in anticipation of the Government triggering Article 50 to exit the European Union, the upside in the FTSE 100 valuation could be enormous. However, it is worthwhile to remember that if the UK loses single market access, meaning the ability to facilitate cross border trade relationships with EU member countries, it could pose a short-term threat to UK corporations and therefore impact equity valuations. Nevertheless, should accommodative central banking tailwinds remain intact, it could cushion any retreat while helping pave the way for future gains as well.