UK100 to New Record Highs as BoE Moves Closer to Rate Cuts & the UK Exits Recession

  • UK100
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UK100 Analysis

Inflation has decelerated substantially in the UK, standing at 3.2% y/y in March, compared to double-digits just a year ago. That is still some way off the 2% target, but the central bank lowered its forecast on Thursday [1]. It expects CPI to fall below this threshold in two years, much sooner than previously thought (Q1 2027). The Bank of England kept rates at 5.25% again on Thursday, but a second member voted in favor of a cut.

Furthermore, Governor Baily hinted at lower rates and less restrictive stance ahead, during his press conference. This brings the BoE closer to a pivot and there is speculation that it could do so as early as June. However, Governor Bailey sustained the uncertainty around the timing, as he did not endorse nor shoot down expectations for June cut, saying it is "neither ruled out nor a fait accompli".[2]

The tight monetary policy has been a key reason for the UK's economic woes, but some good news finally arrived today. Preliminary data showed that the UK exited its recession, as GDP expanded in Q1 by 0.6% q/q and the best performance in more than two years. PM Rishi Sunak cheered the data tweeting that the economy "has turned a corner" [3] and has every reason to be happy as he is poised to have easier monetary condition and stronger growth in what is likely to be an election year.

UK100 runs its fourth straight profitable month, setting new all-time highs after these events. Prospects of lower rates and economic recovery are likely to lead to further gains. On the other hand, market implied rates show a shallower rate path than before, expecting just 45 bps of cuts this year and there is uncertainty around the timing of the first move. Moreover, the GDP figures are welcomed, but they can take off some of the edge around the need for lower rates. On the technical front, the RSI points to overbought conditions and UK100 already faces some headwinds today. As such, a retreat that would challenge the EMA50 (at around 8,280) would be reasonable, but deeper correction towards 8,113 does not look easy under current conditions.

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Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 10 May 2024 https://www.bankofengland.co.uk/monetary-policy-report/2024/may-2024

2

Retrieved 10 May 2024 https://www.youtube.com/watch

3

Retrieved 17 Jun 2024 https://twitter.com/RishiSunak/status/1788813441018315122

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