Uncertainty Following BOE Decision Weighs on Footsie

Following a week focused on interest rate changes, investors are uncertain how to proceed as markets fluctuate and policymakers present different perspectives.​

UK Stock Market Declines

The FTSE 100 index ended lower for the week as domestic retail sales figures weighed on share prices following stronger-than-anticipated data. Both the FTSE 100 and midcap indices fell sharply on Friday, with declines of over 1.2% representing the biggest daily drop in seven weeks. Retail sales had beaten forecasts a day after the Bank of England (BOE) maintained interest rates, with an 8-1 vote highlighting differing views on further reductions this year.

The pound rose to its highest level against the dollar since 2022, driven by widening interest rate differentials after the Federal Reserve cut rates while the BOE held rates. Britain continued to trail Europe and the US, as steeper reductions are anticipated abroad in the months ahead.​ The stronger currency may help offset some inflation, but UK stocks weakened notably in personal and luxury goods. Their underperformance reflected sluggish global economic growth.

Uncertainty About the Economic Outlook

Overall, markets seem uncertain about how to react to central bank decisions, especially given the significant change by the Fed last week. The initial reaction on Wall Street was negative, followed by new record highs the next day. Gains were then reduced on Friday, with the technology-focused and interest rate-sensitive Nasdaq index ending the week lower. While policymakers express confidence in achieving a soft economic landing, investors appear less certain, leading to increased volatility in markets. Weaker economic data around the world had hurt European stock markets, particularly slower demand expected from China which could impact German industrial companies such as automobile manufacturers.

Investors looking for a clear sign of higher prices in the FTSE 100 index may need to wait. While retail sales increased, purchases of large ticket items fell, suggesting UK consumers were wary about significant spending. The GfK consumer confidence index fell seven points in September, while the outlook for the economy over the next year worsened. The focus is now on Chancellor Rachel Reeves' plans to strengthen public finances, with concern about the impact of tax increases on the economy. Typically, the main UK stock market index can be unaffected by domestic issues due to overseas income. However, besides higher oil prices from the Middle East, gold prices increase as interest rates decrease. However, the global economic outlook appears negative as China continues struggling to boost economic growth.​

FTSE in a Wedge Pattern is Risky

The UK stock index faced resistance at the top of a potential broadening wedge pattern, suggesting declines to the bottom end unless supported at 8160, 8100, or 8000, and holding firm in case of declines. Alternatively, if the formation ended early at 7910, the index could continue to 8420, surpassing the peak of 8480 and setting new records past 8500. 8690 emerges as the projected move of the recent pullback to 8160.​

Source: SpreadEx UK100

Key Takeaways

After a week of fluctuating markets and differing views from policymakers, investors remain uncertain about the global economic outlook and the UK. The FTSE 100 index declined for the week as UK retail sales figures weighed on shares, falling sharply on Friday. While retail sales beat forecasts, purchases of large items fell, suggesting consumer wariness. Meanwhile, the pound rose against the dollar on interest rate differentials. The focus turns to the UK government's plans to strengthen public finances and concerns over potential economic impacts.​