Prospects of More BoE Tightening are Detrimental to UK100

UK100 Analysis

This week's CPI report offered some reasons for optimism, as Headline inflation decelerated further to 6.8% y/y in July and core stabilized at 6.9%, just off its multi-decade highs (7.1%). However, inflation remains very high and the Bank of England does not expected it to fall below the 2% target for another two years. What's more, regular pay grew by 7.8% y/y in April-June, in the biggest increase since the series started. This feeds a wage-price spiral and makes controlling inflation much harder.

The central bank raised rates again earlier this month, which are now in "restrictive" territory ^[1], having delivered 515 basis points worth of hikes in fourteen straight meetings, since the December 2021 lift-off. In their typical style, policymakers remained non-committal as to their next steps, creating uncertainty around the policy outlook.

Officials have to contemplate the massive amount of cumulative tightening and its lagging nature, which weighs on economic activity and raises borrowing costs, stressing households and businesses. Despite these considerations, this week's inflation and employment report keep the pressure for more rate hikes and prolonged restrictive stance.

UK100 reacted negatively to these data points and their monetary policy implications, shedding more than 3.5% on the week. It is in risk of new 2023 lows (7,202) and exposed to 7.073, although larger losses towards 6,824 have a higher degree of difficulty.

Despite prospects for more tightening, the BoE has not committed to any moves and on the technical front the Relative Strength Index points to oversold conditions. This may contain the slump and give UK100 the opportunity to rebound. However, it would need closes above the EMA200 (7,520) for the downside momentum to pause, which looks like a toll order at this stage.