The UK, the FTSE 100 and the effects that the Euro difficulties that could impose on sustained UK growth in 2011
Dean Wright ,Senior Analyst ,Fxknight.com
Many questions are being asked this week as the year draws to a close of how the economical outlook for the UK will look in the following year. On the frontlines of media coverage, it would be forgiven to assume that the UK is still at the foot of the hill and struggling to climb out of a recession that has taken hold of the UK economy and not let go. Benefits and welfare have been cut, pubic sector job losses have added to the dire unemployment situation and last weeks protests against raising tuition fees for university students has stamped its mark of perception of a lean treasury chest.
Looking a little deeper into the situation however, it is not so clear to distinguish and the outlook is a little more positive. The office for budget responsibility, the new forecasting office put in place by George Osbourne, has predicted that even though growth will slow sharply in the coming quarters due to the quick fire increase in national output the UK experienced being unsustainable, there will still be a steady increase in GDP output over the next two years.
Employment in the private sector has actually risen and the GDP outlook for next year has been forecasted at 2.1% which is up from 1.8% this year. 2012 has been predicted a further increase in growth, pegged at 2.6 %.
The FTSE has had a steady climb indicating investor’s confidence with the question being raised on whether the FTSE will break the 6000 level this year.
The ups and downs of the Eurozone has certainly had its effects on the FTSE 100 price with the Greek debt crises pulling the FTSE down to 5060 from 5800 in an unfounded short space of time earlier this year. However, the FTSE 100 is back up to 5826 at the close of play last week, and it is possible investors confidence will continue to grow with the economy and push the FTSE up to 6000 level.
From a purely technical point of view, there certainly is scope for the FTSE to reach the 6000. The initial bull move in July saw a pull back to the 50% level on the daily chart. This level was tested several times as support before buyers out numbered the bears and the price started to rise once again. The 161.8% Projection level has been reached, usually signalling the complete move. However the levels have been respected as both support and resistance by buyers and sellers and has closed above the 161.8 % level at 5826.
If buyers now come in at this level to push the price up then there are a number of targets where bears are most likely to come in. Firstly there is the most recent high at 5904. If the bulls have enough power to push through this level, then anticipation of sellers coming in at the 6000 mark will likely see selling coming in just before this level.
If however the 6000 mark is broken, then the 200% Fibonacci level which is at 6071 could be a final resting place before selling drives the price back down again.
To the short side, the 138.2% and 127% Fibonacci projection levels have been significant levels with which traders have respected and so 5674 and 5602 would be ideal short targets for bears.
However, the forces of economics are seldom, if ever straight forward and taking an eye of the bigger picture, even for a second, could lead to some hard faced realities.
The weather outside
The dangers of the European crises from economies such as Ireland, Spain, Portugal and Greece, may have a substantial effect on the UK output with exporting industries suffering. Rising yield prices and the cost of borrowing for many countries in the EU is increasing the strain on member countries. A growing resentment from those countries that have abided by the rules having to foot the bill for other member countries mistakes is becoming ever more apparent and fresh whispers about the survival of the Euro have been sparked, further consolidating pro-Euro and anti-Euro camps.
The actuality of any one of these struggling economies even contemplating leaving the Euro (in order to devalue their new currency and hence growing out of their deficit through exports) would be disastrous and would reach out far beyond their own boarders having the effect of the UK suffering collateral. Weaker economies in question could find themselves in the same dangers that Greece faced if allowed to default and if no bailout was offered: A deposit run and outside investors withdrawing capital; both of which would stall economic recovery, thus leading to a knock on effect in the UK and other countries in Europe with trade and exports.
Something to be wary of as we have seen time and again that when slow reactions to a fast changing economic reality can often lead the unthinkable becoming the inevitable.
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