The inverse correlation between the GBP/USD pair and the FTSE 100 is well known by now. The index has been on a one way trip high since the Brexit referendum of June 23, 2016. GBP/USD dropped from 1.5019 to 1.25 and extended losses to 1.1986 levels. During the same time period, FTSE 100 rallied to record high of 7354 (Jan 16 high).

GBP/USD saw a brief revival in January. It rallied from the low of 1.1986 (Jan 3 low) to 1.2706 (Feb 2 high). That triggered a correction in the FTSE 100 index - from 7354 to 7100 levels.

Daily chart - GBP/USD eyes 1.22

(Click on image to enlarge)

• Tuesday’s bearish outside day candle followed by a bearish follow-through today suggests the spot could drop to 1.22 levels over the next few days. The daily MACD and RSI have turned bearish.
• The ADX has bottomed out and is showing signs of life, which means the bearish momentum could strengthen in the days ahead
• The daily DMI also shows a bearish crossover.

The US-UK 10-year bond yield spread has widened from 1.112 to 1.207 over the last one week, which adds credence to the bearish view. The weaker-than-expected UK CPI print and a dismal wage growth number released this week means a potential for further widening of the US-UK yield spread… especially because the US CPI printed at 2.4% y/y.(above the estimate of 2.4%). The retail sales control group number also printed higher than estimate at 0.4%.

Inverse relationship between FTSE 100 and GBP/USD

(Click on image to enlarge)

FTSE 100 Daily chart - could rally to 7418 levels

• The stock market looks set to clock fresh record highs above 7354, given the inverse relationship between the GBP/USD and the FTSE 100.
• Cable currently trades around 1.24 and could test 1.22 levels, which means a 1.62% drop. Assuming other things remain unchanged, the FTSE 100 could add 1.62% from the current level of 7300… that means a potential rally to 7418 levels.