Stronger British pound may weigh on local companies
Lower probability of Brexit from EU and the following pound strengthening may weight on the British companies. The exchange rate and stock market indices are often negatively correlated. Some investors believe voting against Brexit on referendum on June 23, 2016 may lead to tighter monetary policy by the Bank of England which means higher rates. The FTSE 100 stock index ended last week lower. Will its correction go on?
The British economic growth stunted in Q1 2016 to 0.4% compared to 0.6% in Q4 2015. Moreover, the profits of English companies and banks fell short of expectations. The weak Royal Bank of Scotland (LON:RBS) quarterly earnings were released on Friday which pushed its stocks 5% lower. British Airways stated the lowered demand for air carriage. The Restaurant Group (LON:RTN) stocks showed the record slump of 23%. The British FTSE 100 index is 0.5% above the year opening and its P/E ratio is 18.1. We believe it is a bit overbought compared to the German DAX which is 6.2% below the year opening with Р/Е of 15%. The Bank holidays will be in Britain on Monday. From Tuesday to Thursday various PMIs for April will be released.
On the daily chart GB100: D1 has left the uptrend to move downwards and has approached its 200-day moving average. The MACD and Parabolic indicators give signals to sell. The RSI is below 50. No divergence. The Bollinger bands® have widened slightly which means higher volatility. The bearish momentum may develop in case the British stock market index falls below the two last fractal lows and its 200-day moving average at 6213. This level may serve the point of entry. The initial risk limit is possible above the two last fractal highs, 5-year high and Parabolic signal at 6421. Having opened the pending order we shall move the stop to the next fractal high following the Parabolic and Bollinger signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level at 6421 without reaching the order at 6213, we recommend cancelling the position: the market sustains internal changes which were not taken into account.
Position Sell Sell stop below 6213 Stop loss above 6421