The first two weeks of 2017 saw a phenomenal rally for the UK’s blue-chip index. Over the course of 14 sessions, the UK 100 built on a succession of record closes that began on 22 December to maintain the longest consecutive winning streak in its history – both for positive trading sessions (14) and record closes (12).

However, this record run reached an end on Monday as the winning steak fell at the final hurdle during the final few minutes of the session, closing 10 points lower than Friday’s record close of 7337. This negative session was further exacerbated on Tuesday with the rally in Pound Sterling as a result of UK Prime Minister Theresa May’s speech outlining the proposed terms of Brexit negatively impacting the plethora of foreign earners on the index. An eventual close over 100 points in the red as a consequence of Sterling’s strongest performance since 2008 saw negative sentiment finally overcome the charge of the bulls for its worst session since 27 June, the Monday after the Brexit weekend.

So does this mean that the UK Index rally is over?

With several events looming that could have a significant impact on the US Dollar, subsequently impacting the Pound, perhaps not.

Whilst the headline event of the week is without doubt the inauguration of Donald Trump as the 45th President of the US, macroeconomic data in the meantime could have a significant impact on the fate of the greenback, thus the Pound and therefore the UK Index .

Wednesday afternoon sees the release of the latest US Consumer Price Index (CPI) inflation reading, something that is keenly watched by the interest rate setting Federal Reserve as a major factor for its policies. With the US economy currently running very close to full employment – as stated by several Fed officials in the run up to last month’s rate hike – and economic growth already rising, controlling the rate of inflation is their primary concern. Keeping that rate below 2% is the generally accepted target, and by raising interest rates to do so, the Federal Reserve increases demand for the Dollar. As a result, a reading showing significant uptick to expectations could halt the Dollar’s 2017 slide.

That, however, does not detract from the importance of Friday’s inauguration speech from the new President. Markets were left underwhelmed by last week’s first press conference since winning the election as a lively Donald failed to confirm the policies he would be pursuing. If the (presumably) heavily scripted event once again glosses over key pledges he made on the campaign trail, markets could react unfavourably, with the stronger Dollar that had previously tracked his rise to power falling by the wayside. Alternatively, if he delivers on his range of promises to increase US growth – cutting taxes, increasing infrastructure spending and deregulating the finance industry – could see a strong Dollar return.

Currently, the UK Index is holding around 7220 point support, buoyed by the overnight strengthening of the Dollar. Despite accelerating wage growth within the UK economy, an inflationary pressure that, alongside a recently adopted hawkish tone from the Bank of England Governor Mark Carney, would normally see GBP rally, this morning has so far seen the USD take the lead – much to the delight of UK Index Bulls.

Whether this is due to an element of profit taking for GBP investors after yesterday’s best performance for Sterling in 8 years or because of renewed confidence that Trump will implement an expansionary fiscal policy in the states is unknown.

However, what is certain is that foreign exchange markets hold the key to this week’s UK 100 fate.

Henry Croft, Research Analyst, 18 January