The talk of the month is without any doubt the Brexit situation combined with the U.S. Fed monetary decisions. What is happening on the charts of the British stock market (FTSE100 index) as well as the leading currencies Euro (EURUSD) and British Pound (GBPUSD)? Do they reveal any insight into the dominant market trend?
It is easy to get caught up in the endless stream of news, and get fearful or greedy. As said charts are the antidote against emotions, and it was also the key point in 10 Tips To Master Investing Without Emotions.
So let’s have a thorough look at the chart technicals instead of going with the endless stream of news.
With the Brexit deadline looming next month, FTSE100 volatility should increase in the next few weeks. Despite no actual deal with the EU, the index had an impressive start of the year, climbing around 8% since the end of December.
However, as you can see in our chart below, the price action is locked inside a downward channel formation, which goes back to mid-2017. Two failed breakouts had occurred on both sides, but the price continues to trade inside the channel.
Since the market is pricing in a positive Brexit resolution – a late agreement or an extension of Article 50, in terms of online trade, FTSE100 is expected to continue on its way higher, towards the upper line of the channel, where significant resistance is expected.
Despite a positive outcome for Brexit, sluggish economic growth in Europe is expected to hit the UK as well, leading to diminishing risk appetite for stocks, and thus bad returns for the FTSE100. We expect the price to reach the upper line of the channel and then gradually start to move lower, towards the 6,500 area, where support might be found.
Following a double top formation which formed in the first half of 2018, Cable had been under pressure, trading most of the time below the 4h chart 200 moving average. Despite the Brexit uncertainty, the pound gained thus far in 2019, supported by a weaker US dollar, as the Fed became more dovish.
At the present time, we see the bulls trying to form a bottom around the moving average, similar to what we saw in October last year. At that time, the price action broke above the 200 MA, but sellers resumed around what would later be a bearish trend line.
We could see that happening again – a bull leg up towards the trend line, followed by renewed selling pressure. The prospects for significant gains seem to be reduced thus far, which is why we believe selling on rallies towards the trend line might result in a nice trading opportunity.
Since mid-November 2018, EURUSD had been locked in a range between 1.1500 and 1.1220. Although we can see a failed upside breakout, the overall price action structure had not changed. The buyers were not able to keep the price above the 4h chart 200 MA, communicating the sellers are re-joining the trend after each short-term rally.
Sluggish economic performance in the EU had already led to rumors of a new LTRO program from the ECB. Although no actual information came out from the central bank, in the medium term we expect bullish momentum to be capped.
We might see a new retest of the upper line of the range, but in the long run, we expect EURUSD to move lower, towards 1.1100 area, where a June 2017 low is located.
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