Footsie Direction Hinges on CPI and Policy Cues

UK CPI data and a speech by Deputy Governor Dave Ramsden could influence the performance of Footsie following four consecutive weeks of losses, with favourable inflation numbers suggesting a rebound for the premier index.​

The Stalling Recovery

The UK economy initially showed signs of rebounding at the start of the year, but it now shows contraction signs as businesses express concerns over Chancellor Rachel Reeves' efforts to address budget deficits. However, the announced tax and spending measures are expected to contribute to higher inflation, potentially preventing the BOE from easing. Markets expect the BOE to pause its rate-cutting cycle next week unless there is a substantial decline in inflation.

The FTSE 100 is renowned for its international exposure, with numerous global companies generating most of their revenue overseas. Nonetheless, the global outlook is not particularly promising. For reference, Britain's primary trading partner, the Euro Area, expects sluggish growth even before the potential impact of an impending trade war with the US.

Footsie’s recent underperformance has been led by a cooling outlook for raw materials due to slower growth in China, falling oil prices as analysts worry about a supply glut, and the potential impact on UK drugmakers from the appointment of RFK Jr. to head up health agencies in the US.​

Time to Surge?

UK stocks appeared to be starting the week on a positive note. However, investors remain cautious ahead of the upcoming CPI report. Britain's inflation rate is expected to have accelerated to 2.2% from 1.7% previously, surpassing economist and BOE targets. This is largely attributed to transitory factors, such as higher fuel prices. Nevertheless, the core rate, closely monitored by policymakers, is also projected to rise to 3.3% from 3.2% previously. This likely contributed to market caution around the BOE's potential rate cuts until the downward trend reasserts itself. Traders, for instance, were particularly harsh on home builder prices last week.

A day before the CPI release, BOE Governor Andrew Bailey will be in Parliament addressing questions likely concerning the impact of the Budget. He will be accompanied by Deputy Governor Dave Ramsden and the new Board member, Alan Taylor, who will make his first appearance. If the CPI numbers remain within expectations, markets anticipate that the BOE will adopt a more gradual easing path compared to its main counterparts, the ECB and the Federal Reserve, both of which are expected to ease next month. In contrast, the English bank is anticipated to hold.​

Potential Footsie Triangle

The recent decline in the FTSE 100 index to 8000 could have marked a local bottom of a potential triangle pattern, with resistance expected near the 8300-8400 region. This assumes prices overtake the 8160 swing and the highly liquid level of 8250. Conversely, a breach of local support could prompt a retreat to 7910, increasing the likelihood of a double-bottom formation.​

Source: SpreadEX / UK 100

Key Takeaways

The UK economy faces potential contraction, with businesses concerned about government measures to address budget deficits. Higher budget-led inflation could prevent the BOE from easing monetary policy, leading markets to expect a pause in rate cuts unless inflation declines unexpectedly. With the FTSE 100's underperformance driven by cooling raw materials demand due to slower Chinese growth, falling oil prices amid oversupply concerns, and potential impacts on UK drugmakers from US healthcare policy changes, investors remain cautious ahead of the CPI report. Rising inflation could prompt the BOE to adopt a more gradual easing path than other central banks.​