FTSE, EUR/USD Forecast: Two trades to watch

FTSE rises as the pound sinks and growth stalls

• UK GDP stalls at 0.1% vs 0.2% expected
• GBP/USD falls below 1.22
• Miners led the index higher, tracking iron ore prices higher
• FTSE breaks out of range

The FTSE 100 has risen to an over five-week high after weak GDP data sent the pound lower.

UK GDP figures showed that the UK economy grew 0.1% in November, slower than the 0.2% forecast. However, this is up slightly from the 0.1% decline in output in October and September. The data confirms that growth momentum in the UK has cooled since labour came to power and confirms the country is stuck in a stagflation trap.

Following the data, the pound has fallen back below 1.22, paring yesterday's gains following cooler UK and US inflation data. The weaker pound, owing to the more beneficial exchange rate, helps to boost the multinationals which make up around 80% of the FTSE.

Mining stocks are leading the gains, boosted by a rebound in iron ore prices and a rally in gold following yesterday's US inflation data, which increased hopes of a further Fed rate cut this year.

In corporate news, Antofagasta is up 2.9% after posting higher copper and gold production in Q4, while Rio shares have climbed as the company reaffirmed its outlook and announced increased copper output.

Taylor Wimpey is leading the losses, down over 3%, after reporting UK home sales near the top end of guidance, but flagged growing costs.

Looking ahead, attention will turn to US jobless claims and retail sales later today for further clues over the health of the US economy and the outlook for Fed rate cuts.

FTSE forecast – technical analysis

The FTSE 100 has traded within a holding pattern since May last year. More recently the price has extended its recovery from 8000, rising above the 200 SMA at 8225 and has broken above 8325, the level that has capped gains for much of the past 9-months.

Buyers supported by the bullish breakout and the RSI above 50 will look to extend gains towards 8400 and 8480 to fresh record highs.

Support is seen at 8325. A break below here takes the price back into the holding channel and exposes the 200 SMA at 8225. Below here, 8150 comes into focus ahead of 8000.

EUR/USD holds below 1.03 ahead of ECB minutes, US retail sales & jobless claims

• German CPI was revised higher to 0.5% MoM
• US retail sales are forecast to rise 0.6%
• EUR/USD remains in a downward channel

EUR/USD is holding steady below 1.03 after modest losses yesterday amid ongoing concerns surrounding the Eurozone’s economic outlook. Dovish ECB commentary reinforces the expectations of further rate cuts while the USD rises versus major peers.

The euro is finding some support from an upward revision to German inflation, which rose 0.5% MoM in December, while core CPI rose 3.3%, up from 3%.  However, the data raises stagflation concerns for the eurozone's largest economy and reaffirms expectations of further rate cuts by the ECB.

ECB policymakers have remained dovish. This week, Finland governor Olli Rhen commented that he sees monetary policy leaving restrictive territory, most likely by midsummer. While ECB’s Philip Lane warned over keeping rates too restrictive for too long.

Attention now turns to ECB minutes, which could provide further clues about the outlook for rate cuts this year. eBay is expected to cut rates by 25 basis points at the end of this month, and three more rate cuts are expected this year.

The USD is steadying after losses versus its major peers yesterday after cooling US core inflation and falling bond yields pulled the currency lower.

US core inflation was 0.2% month on month in December down from 0.3% and annualised core inflation eased to 3.2% below the three-point 3% expected. Attention now turns to a slew of U.S. data, including jobless claims and retail sales. Solid numbers could highlight the strength of the US economy and lift the US dollar higher.

EUR/USD forecast – technical analysis

EUR/USD has been in a downward trend since September, forming a series of lower highs and lower lows before running into support at 1.0180.

The pair remains vulnerable as the bearish trend persists and the RSI is below 50. Sellers will look to take out 1.0180 support to extend losses towards parity.

Meanwhile, buyers could be encouraged by the hammer candlestick on January 13 which could point to a bullish reversal. Buyers would need to rise above 1.0330, the November low, and 1.0460 to negate the near-term downtrend. A rise above 1.0630 the December high, creates a higher high.