UK100 Upbeat as Wages Ease Ahead of the BoE’s Policy Decision

UK100 Analysis

Average weekly earnings in the UK grew by 7.2% in the August-October period, while excluding bonuses they expanded by 7.3%, marking a significant deceleration from the prior print. Despite the recent moderation, regular pay growth remains close to historically high levels. This has been a constant headache for the Bank of England, since it makes controlling inflation harder. Furthermore, the government will increase the minimum wage by 9.8% from April, which could lead to a reacceleration.

Price pressures have eased substantially, as CPI rose by 4.6% y/y in October and the slowest pace in two years. However, it is still far from the 2% and the central bank does not expect a return below this threshold until Q4 2025 ^[1]. Helped by the significant progress on inflation and worried over the ailing economy and high borrowing costs, policymakers have not raised rates since summer, staying on the sidelines over the past two meetings.

More action could still be required though, in order to restore price stability. Officials have talked of sustained restrictive stance, they have not closed the door to further tightening and have dismissed market hopes for rate cuts. Just two week ago on a Daily Focus interview, Governor Bailey said that the bank has "further to go" on achieving its goal and warned that that it is not in a place to discuss rate cuts. ^[2]

UK100 runs its second straight profitable month, helped by the BoE's less aggressive stance and inflation moderation. It has moved above the 200Days EMA (blue line) and rises after today's easing in wage growth. It retains its upside bias and the chance to take out the descending trend-line for February's record highs (at around 7,630), although we are cautious at this stage around its ability to tackle 7,758.

On the other hand, with inflation still high, more hikes on the table and a weak economy, there is risk for renewed pressures. These could send UK100 into the daily Ichimoku cloud (7,510-7,430), but strong catalyst would be needed for a drop below it. In any case, the trajectory of the index will be determined by Thursday's policy decision by the BoE, while an inflation update is due next week.