The strong come back in UK stock market last week argued that investors were indeed not too worried about Brexit. FTSE 100 angered the best week since 2011 and closed at 6577.83, well above pre-Brexit high at 6380.58. It's seen while uncertainties remain, business will still carry on between UK and EU before completing the negotiations. Meanwhile, the depreciation in Sterling's exchange rate will give UK a certain advantage. In addition, BoE governor Mark Carney hinted at further easing in the summer and gave investor another boost during the week. On the other hand, Sterling remained soft during the week and weakened further against Euro towards the end. These two trends will likely continue in near term until we have further political developments in UK.
As noted during the week, FTSE's break of 6427.32 and 6487.89 resistance marked the completion of a head and shoulder bottom pattern (ls: 5768.22, h: 5499.50, ls: 5788.74). From a near term perspective, the index should now target 100% projection of 5499.50 to 6427.32 from 5788.73 at 6716.55, with prospect of hitting 7122.74 high later.
Stocks were also strong in US with DJIA gaining 2.15% on the week while S&P 500 rose 3.22%. Bother were their best week since November. There were expectations that Fed will hold off from rate hike this year due to the Brexit related uncertainties. Fed fund futures were pricing in 0% chance of rate hike, 2.4% chance of rate cut in July. For the rest of the year, futures are pricing in 5.9% chance of hike and 2.2% chance of cut in September, 5.9% chance of hike and 2.2% chance of cut in November, 23.3% chance of hike and 1.8% chance of cut in December.
However, it should be noted that Fed hawks might be starting to come back after Brexit fears fade. For example, Cleveland Fed president Loretta Mester said on Friday that "waiting too long increases risks to financial stability and raises the chance that we would have to move more aggressively in the future, which poses its own set of risks to the outlook." And Fed should "gracefully navigate back toward a more normal policy stance." And the situation makes the June non-farm payroll numbers to be released this Friday very important.
From a near term perspective, DJIA is very likely to extend the rebound from 17063.08 to 18167.63/18351.36 resistance zone. Reactions to this resistance and employment data should be closely watched this week. The dilemma is that a strong break through historical high at 18351.36 will certainly give Fed some confidence to raise interest rates later in the year. But such expectations could limit the gain in stocks. So, the final path the market chooses will reveal much about the underlying momentum.
Regarding dollar, the price actions from 96.70 are clearly corrective in nature and indicates that rise from 91.91 is in progress. We'd expect further rally to 100% projection of 91.91 to 95.96 from 93.01 at 97.06 next, with prospect of targeting 161.8% projection at 99.56. 91.91 could be the end of the third leg of the consolidation pattern from 100.39. And if that's the case, we shall see upside acceleration in the next move that would push it through 100.39/51 resistance zone. We'll favor this bullish case as long as dollar index stays above 55 days EMA (now at 94.94), without touching it.
Regarding trading strategies, we'd prefer to sell Sterling this week on anticipation of policy easing from BoE in July or August. Commodity currencies looked strong last week. However, we'd doubt if the strength would continue. Firstly, strength in US stocks could indirectly help dollar. Meanwhile, reversal in US stocks would hurt risk sentiments. So, we'll avoid commodity currencies. While Euro stays strong against Sterling, outlook in EUR/USD argues that the common currency will lag behind the greenback. GBP/JPY could be a good candidate, only if the BoJ is more predictable. We won't be surprised to see BoJ surprise the markets any time with extra easing. And, there is no clear sign of risk aversion for the moment. So we won't take GBP/JPY. Hence, that leave us with GBP/USD to sell. But with NFP uncertainty, we'll be a bit cautious and sell GBP/USD on recovery to 1.3700, which is close to 4 hours 55 EMA, with a stop at 1.4000.