Article 50 has been triggered so we are in new realms, new territory. I think that all the speculation in the markets has led to the weakness in the pound and uncertainty, but at the same time we have seen record levels in the FTSE. So I would say it is really important that we focus on not just what’s going to happen in the bigger picture so the trade deals etc. but also what is going to happen in the UK now.
We have to control inflation, we have to talk about interest rates ‘normalising’ the economy like they have done in the US, or are in the process of doing. The real tough point now for the UK is to all be united and to get behind the common aim, which is to get the best deal for the UK as a whole. To do the best trade deals, to make the best kind of partners and to go and seek opportunities where we have perhaps been lazy or perhaps been unable to do by being EU members.
I think the FTSE has every opportunity to correct from these higher levels, because we are going to have to talk about interest rates going up at some point. Historically, that is bad for the markets. The FTSE has never felt comfortable above 7,000. I only really believe its holding above 7,000 because of the movement in the US, but again, these things are cyclical. They take time.
It has been 10 years since the crash and generally every seven years, we see some kind of major correction – we haven’t seen that yet, but the correction is coming. So if you’ve seen the pound drop and the FTSE go up, maybe we see the correlation there.
Maybe if we see the FTSE drop and it gets back to reasonable normal levels, we will see people pull out of risky investments, which the shares and indices are and put it back into cash.
And again, if we have an inkling that the bank of England and Mark Carney will put interest rates up, then we are going to see this bring additional strength back into the pound, which is dramatically oversold in one event.
So I think there is a lot upside in the pound, a lot of potential downside in the FTSE, but what we do know is that markets move and there will be opportunities for short-term traders to make money. So really picking an idea of the markets we will be in in six, 12, 18 months or two years’ time is incredibly difficult. There will be a lot of movement in both directions for the pound and the FTSE.
Net, I think we are too high in the indices and they will correct to more reasonable levels. I believe really, about 5,500 ranged between 6,000 is a lot more comfortable place for the FTSE to be.
I really do believe that the pound, once the trade deals start to come in and we see not the contagion effects but the fear in the FX markets move into the Euro that it will head much more towards parity than the pound, would head towards new lows. 1.20 is the absolute low that the pound will hit short-term. 1.30 /1.45, 1.64 is a key level that I think the pound will get to next to the Dollar — probably within two years.
Again, bold and big movements, but I think with a currency so massively oversold, once the good news starts to come in from these trade deals, then there will be very little to stop investment firms, the big speculators and even central banks getting involved buying large chunks of the pound.
Steve Ruffley is Chief Market Strategist at InterTrader and author of the Ruff Guide to Trading