£/$: The rally has been temporarily capped at 1.7060 resistance but the risk still remains for a move toward 1.7310.

The price action seen in the US markets overnight provides a telling story of the strength of this rally. The third wave of a trend tends to be one of the most powerful waves in an overall bull market with corrections being limited and shallow despite overbought momentum indicators. Investors have woken up to this and any small correction is being snapped up quickly. With cash still sitting on the sidelines, from institutional investors, it may be some while yet before any meaningful pullback emerges. Earlier in the week, we noted that from a technical perceptive alone a conservative target for this third wave is 5580 for the FTSE 100. For the S&P 500 the conservative target is 1246.

Yesterday sentiment was boosted by, again, better then expected corporate news but also a renewed sense of stability in the US housing market. So far, the rise over the past three months in mortgage rates appears not to have dented sentiment. If this stabilisation/rebound can continue then this will provide an underlying boost to consumer confidence/spending.

Going forward, this boost may be needed given the likely weak conditions of employment. Before Friday’s, key nonfarm payroll data we will get a sense of where the risks are from today’s US releases which include nonmanufacturing ISM, ADP private payrolls and the Challenger report. In Europe, the final pieces of data come into play before Thursday ECB and MPC meeting with the release of service sector PMI in Europe and the UK.

Finally, sterling rallied sharply yesterday against the US dollar reaching a 9 month high. It has now approached a significant resistance level at 1.7060. However, with risk appetite continuing to rise it is currently difficult to see any near term catalyst that could prevent a further US dollar depreciation. As such, in the medium term the risk still remains that £/$ could rally through to its key 50% retracement level at 1.7310.

Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:

Please note this report provides a guide to some of the relevant areas that individual investors should consider discussing with an authorised adviser in relation to their specific circumstances, it does not constitute individual advice. As a result no action should be taken or refrained from being taken as a result of its content.