Financial market research and analysis

The FTSE and the pound are set to close the week in a potential short-term trend reversal.

The FTSE traded above the 6900p level for the first time since June 2015. After reaching 6955p on Monday, the index gave back more than 100 points. This could be the beginning of a mid-term correction on the 1200p rally following the post-Brexit dip at 5718p.

Fundamentally, the FTSE, which used to be popular among investors for its high dividends, has become more affordable with a cheaper pound. This was one of the major drivers behind the rally we observed over the past couple of weeks. Nevertheless, the UK’s stocks became gradually less attractive as dividend yields fell sharply over the past two months, bringing the UK dividends closer to Euro Stoxx level. In the zero-to-negative rate environment, squeezed dividends could persuade many investors to chase profits in alternative markets.

Technically, the FTSE could retreat to 6660p, which is the 23.6% retracement on the post-Brexit rally, then to 6485p, the major 38.2% retrace. Below this level, we could consider a mid-term bearish reversal towards 6200p, the 200-day moving average.

The pound recovered above 1.30 against the US dollar on a combination of good macroeconomic news in July. The unexpected fall in claimant counts, a satisfactory inflation report and a surprise rise in the UK’s retail sales, increased appetite in the pound. We remind that the pound market has been heavily sold since the UK’s decision to quit the European Union. The speculative net short contracts on the pound climbed to historical high levels. Therefore, there is decent potential for a pound recovery as short-term speculative shorts could find it cautious to cash in their profits to avoid getting trapped into a strengthening positive momentum. A collective profit taking could underpin the upside correction in Cable.

Dollar gains before weekly closing bell

The US dollar recovered as Asian traders turned long before the weekly close. The Federal Reserve minutes released on Wednesday, failed to revive expectations for a Fed rate hike as soon as next month. Nevertheless, the US’ monetary policy remains relatively more hawkish compared to the rest of the world.

Fitch decides on Turkey

After the market close, Fitch will announce its decision regarding Turkey’s credit rating following the failed coup attempt on June 15th. We do not expect Fitch to cut Turkey’s credit rating as the social and political risks in Turkey have normalised since the unfortunate event.

The Turkish lira is under rising selling pressure before next week’s monetary policy decision. In the dirt of red flags, in terms of political and economic agenda, the Central Bank of Turkey could continue trimming rates as it moves towards a policy simplification.