BoE Hikes as Struggle Against Inflation Continues
One of the most important items of news this week was Thursday’s statement and press conference from the Bank of England. As widely expected, there was a hike of 0.25%, but comments from Andrew Bailey and the rest of the MPC afterwards also suggested the possibility of further tightening. This article looks at the reaction so far by cable and the FTSE 100.
Inflation in the UK is by far the highest among the top 20 economies apart from Turkey:
Annual non-core inflation has remained stubbornly in double digits since the third quarter of last year. Unlike in the USA, there’s no indication yet of a sustained drop. The BoE currently expects inflation around 5% in the fourth quarter of this year and a drop to 1% in 2025.
According to yesterday’s comments, only around a third of the impact of this cycle of tightening so far has been felt in the British economy. Given that it takes time for monetary tightening to show results, some participants in markets have voiced the concern that the bank rate could end up too high and trigger or exacerbate a recession.
That’s one of the main reasons for losses by the pound and FTSE 100 in the aftermath of yesterday’s decision. The focus now is on the British job report including claimant count change, scheduled on Tuesday at 6.00 GMT. If there’s another significant negative surprise this time, the pound might fall further.
Cable, Daily
There seems to have been a decisive rejection around $1.265, at least for now, so with a crossover of the slow stochastic and low ATR one might expect cable to move lower in the short to medium term. The main supports in view for now are the 50 and 100 SMAs around $1.24 and $1.228 respectively. A push below that value area seems to be very unlikely next week unless Tuesday’s job report is really surprisingly bad.
Considering the chart alone, though, the uptrend seems likely to continue in the longer term. Attempts to move below the 200 SMA have been rejected quite consistently since the fourth quarter of last year, so a potential leg up might reach $1.28 in the medium to long term.
The key here is to monitor next week’s data, most importantly claimant count change but also American retail sales. How the price reacts to these could signal how long the consolidation or retracement could last.
FTSE 100, Daily
The FTSE 100 has been somewhat more volatile than most other major indices since March. However, the sectors which have under- and outperformed are quite similar, with manufacturing and tech generally doing well and consumer discretionary losing ground. The UK was an exception to the banking crisis earlier this year, with some major British banks such as Natwest and HSBC up more than 20% so far in 2023. Dividend yields from constituents are generally good compared to the average for major American companies but there have been several cuts this earnings season.
Earnings season for major British companies is more-or-less over now, so attention could return to general economic data, especially claimant count change as noted above, and the chart. The price seems to be comfortable for now within the value area between the 50 and 100 simple moving averages although these showed a death cross around the middle of last month.
UK100’s reaction to yesterday’s news was also significantly weaker than the pound’s relatively speaking. 8,000 seems to be a clear resistance, with a move above there in the near future unfavourable, but a sustained move lower to test the 200 SMA also seems unlikely in the next few weeks barring a big surprise from Tuesday’s data. 7,680 was the high in January 2020, so this area is an important reference and close to the middle of the recent range.
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The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.
This article was originally posted on FX Empire
