FTSE closes flat and pound surges on Brexit optimism

The FTSE kicked off trading on the front foot supported by Vodafone’s result and easing trade tensions trumping the US tech stock selloff. However, a sharp decline in commodity prices, a Brexit boosted pound and a mixed start on Wall Street dragged the FTSE to the flatline to close.

Commodity stocks had a rough ride on Tuesday, with the oil & gas sector winning the prize for the largest sectorial decliner. Oil dumped over 3.5% following a warning from Trump that the price of oil should be lower. The irony here is that it was Trump and his sanctions on Iran, and then not, that set of the supply demand mess that the markets are currently unravelling. Today’s losses mean that oil has given back all its gains from the previous session, which came about amid speculation that OPEC would curb production. At its worst oil was trading some 5% lower, pulling BP and Shell 2.6% and 3.6% lower respectively.

The pound has been on a wild ride so far this week. After heavy falls in the previous session, the pound was over 1.4% higher as it continues to oscillate to Brexit sentiment. Reports that there are just a few small outstanding issues to a Brexit deal was enough to send the pound back over $1.30 to a peak of $1.3020, almost 200 points up from Monday’s low. 

Wages grew at fastest pace since 2008
Whilst Brexit remains the unequivocal key driver of movement in sterling, the pound also received a boost from impressive UK wage data. Wages grew at the fastest pace in over a decade at 3.2%, ahead of expectations and supporting the BoE’s belief that there is no spare capacity in the UK labour market. The upward pressure on wages is an indication of domestically generated inflation which supports the BoE’s calls for the need of tighter monetary policy, in the case of an orderly Brexit.

Pound to $1.32?
The Brexit divorce deal is expected to be presented to the cabinet for signing off tomorrow.  Pound traders will also look towards inflation data due tomorrow. The expectation is for inflation to have ticked higher to 2.5% from 2.4%. Core inflation is expected to remain constant at 1.9%. Strong inflation data, combined with continued Brexit optimism could see the pound push through resistance at $1.31 and target $1.32