Supported by Crashing GBP, FTSE Stable Above 7000.00 – Traders May Consider Buying

The U.K’s FTSE 100 swung between gains and losses in early European trading hours as the Sterling remained weak after a flash crash in early Asian trade. In a rather odd turn of events, a plunge in the British Pound has supported the FTSE in staying above the  7000.00 level since Tuesday.

The Cable was in a freefall at the start of the Asian session. Fears over potentially tough negotiations between the U.K and the European Union on the departure of the UK from the EU, triggered the selloff as automated sell stop orders were hit in a thin market. Sterling consequently plunged to around $1.20000 before bouncing back to around $1.24771 from where the currency again reversed lower and resumed its move downwards.

A weak pound is typically considered to be beneficial to the FTSE 100 index as many of its constituents generate a large part of their revenues abroad. A fall in the value of the pound against other major currencies means overseas revenues are worth more when they are converted back into sterling.

With most of their revenues generated in U.S dollars, mining companies were among the biggest gainers on the London Stock Exchange, on Friday. At the time of writing, Anglo American rose 2.76%, BHP Billiton PLC added 2.8%, and Rio Tinto PLC gained 2.02%.  Also leading the way higher in London, Glencore Plc added 2.33%, gold miner Randgold Resources climbed 2.9% while shares of Mexico-based precious metals mining company Fresnillo PLC jumped 2.79%.

HSBC Holdings PLC also helped the FTSE higher with shares putting on 2.35%. Most of the HSBC group’s business is located outside the U.K. With a major part of its operations also based in the U.S, the bank stands to benefit from a financial environment of rising interest rates in the US.

While exporters have benefited from the fall in sterling, importers’ stocks fell off as their costs will be burdened by the exchange rate. EasyJet shares lost 4.71% so far, extending its losses from Thursday’s session when the stock was down by 6.9%. The airline said on Thursday that its full-year profit would drop as much as 29% due to terrorist attacks that slowed bookings and a plunging Sterling. Shares of International Consolidated Airlines Group PLC, parent of British Airways, also fell 3.0%.

Markets are now focusing on the monthly U.S Payrolls Data which will be released later today. Data on the number of new jobs added, the unemployment rate and average hourly earnings are considered as one of the keys to assess the possibility of a Fed interest rate hike at the end of this year. A strong report will boost the U.S dollar and further dampen the Sterling which will in turn support the FTSE index.

Technicals Analysis

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Fig: FTSE 100 index technical chart

Since the day the index surpassed the 7000.00 threshold, FTSE has traded in a thin range between this major level, which has turned into a firm support, and the resistance around 7122.00. Recent swings in the price have prevented the market back from entering the overbought range as two way trading has helped stabilize indicators. The two MAs are still placed below the price action, thereby consolidating the up moves.

Trade suggestion

Buy Stop at 7070.00, Stop loss at 6990.00, take profit at 7120.00

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