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FTSE outperforms amid sterling weakness and falling UK yields

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By Craig Erlam  

The pound was on the decline again on Thursday, having fallen over the last couple of days on the back of some worrying economic figures from the UK.

Whether we’re talking about a blip in the data or cracks finally appearing in the economy after a very aggressive tightening cycle from the Bank of England, traders are paring back expectations for interest rates once more.

We’re seeing UK 10-year bonds rising (yields falling) which goes against the trend we’re seeing across Europe, the US, and Japan, for example.

Two more hikes are still priced in over the coming months, but that could be pared back further if the data continues on the same path, especially if we see some better wage numbers following the spike in the three months to June.

That weakness in the pound may be helping the FTSE to outperform, with it being one of the only European indices still in the green after early gains – seemingly driven by knockout earnings from Nvidia – fizzled out over the course of the day.

A bearish breakout in oil?

Oil prices have come off in the last few days after a powerful rally since late June and then some very choppy trading this month.

Supply cuts and a more resilient global economy saw crude storm higher earlier in the summer and while we are still seeing these to a large extent, which is why we haven’t yet seen any major reversal, the latter is looking increasingly questionable.

Recent data from Europe has been worrying at best, arguably just poor and recession-worthy.

The US is still in a strong position, but there are areas of weakness and if interest rates are going to stay higher for longer, further cracks could appear. Perhaps this economic doubt has contributed to the stalling we’ve seen and may even trigger a correction.

As yet, price action looks okay, but a break below $81-82 a barrel in Brent and things may look less good. That would constitute a break of recent technical support and perhaps either signal or be the catalyst for something deeper.

Uninspiring and sluggish rebound in gold

Gold is making a small recovery this week although it’s looking a little lethargic still, even at this stage. On Wednesday it appeared to gather some steam but on Thursday that looks to have faded.

There’ll be plenty of Fed speak over the next couple of days, the most notable being Chair Jerome Powell’s speech Friday which could reinvigorate the yellow metal one way or another.

But as things stand, this has all the characteristics of a minor corrective move, with traders perhaps taking a step back in anticipation of potential fireworks at Jackson Hole.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.