Strong pound hurts FTSE 250

The strong run in the FTSE 250 appears to be coming to an end, hit by a raft of profit warnings from UK companies that have featured complaints about a strong pound.

Pound coin
Source: Bloomberg

The FTSE 250 mid-cap index comprises many UK companies that also have operations abroad. As such it is a far better barometer of the performance of ‘UK plc’ than the international FTSE 100. It has handily outperformed the FTSE 100 since mid-2009, rising over 80% compared to 40% for the FTSE 100. Since January, however, the index has faltered, losing 3.5% versus 1.6% for the FTSE 100 as concerns about a stronger pound begin to bite.

At its peak this year, the pound had gained around 3.5% against the US dollar. This has fuelled a number of warnings – 137 alone in the first six months of 2014 – from UK companies that profits will be lower in coming months as UK exports lose their competitiveness. Although GBP/USD has since declined, the pound is still 12% higher than it was in mid-2013. This goes some way to explaining why the FTSE 250’s rally has faltered. Investors are concerned that UK firms will see further declines in profits, and so allocations to companies in the index have been cut back. It is important to keep this all in context, however – the pound is still 20% weaker against the US dollar compared to its peak in 2007. It’s unlikely we’ll see CEOs praising a weaker pound for higher profits if this rally in GBP/USD comes to an end, however.

The FTSE 250 is now 7% from its high of early March, and has slipped to its lowest level since mid-December. The 50-DMA is now below its 200-day counterpart for the first time since February 2012, with the ‘death cross’ occurring for the first time since August 2011.

The level 15,100 has seen buyers step in again, as was the case in December 2014, when this level coincided with the 100-DMA. Now, however, the 100-DMA is on the verge of crossing lower, as the index gives back gains of the past eight months. If 15,100 is breached then there is little potential support ahead of the 14,630 level, the low of October 2013.

Any bounce to the upside would need to clear the 200-DMA at 15,810/15,820, before moving to challenge the July high just above 16,000.

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