Preview: Bank of England set to raise interest rates by 25bp; focus on forward guidance

Tomorrow at 9.00pm AEST, the Bank of England is widely expected to raise interest rates by 25bp to 4.50% with a 7-2 vote. The focus, therefore, will be on the MPC’s forward guidance.

Growth has been stronger than expected over the past two quarters, and the UK economy may yet avoid a recession. Inflation remains high due to a drop in labour supply post the pandemic and from global pressures, which have driven price rises for food and energy.

At its meeting in March, the BoE noted that inflation is expected to “fall sharply over the rest of the year”. Evidence of the expected fall is so far lacking. While headline CPI eased to 10.1% YoY in March, from 10.4% in February, it was higher than market expectations of 9.8%. making a dovish pivot extremely unlikely this month.

However, like here in Australia, the impact of the BoE’s rapid 415bp of rate hikes has yet to be felt. This will change in the months ahead as mortgages that were fixed at low rates during covid roll-off.

Furthermore, evidence shows that the labour market is starting to cool, and firm insolvencies have increased.

A combination expected to see BoE water down its forward guidance from March that stated: “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

The BoE’s terminal rate is currently viewed at 4.87%, suggesting the market remains evenly split between a further two rate hikes taking the official cash rate to 4.75% as opposed to those looking for three hikes taking the official cash rate to 5%.

Bank of England official bank rate

DAX technical analysis

The stunning outperformance of European Equities since September does appear to be nearing the end.

However, a sustained break back below the horizontal support at 15,700/600 (coming from the highs in February and March) and uptrend support at 15,400 from the October 11,829 low is needed to confirm that a deeper pullback is underway towards the 200 day moving average at 14,400.

Until then, allow the rally to extend towards 16,400.

DAX daily chart

FTSE technical analysis

Since our last update in mid-April, the FTSE has fallen back to support at 7700/7600. Should it fall much below this support zone, we look for the decline to extend to the 200-day moving average at 7500 before the March lows at 7300/7200.

Aware that if the FTSE holds support at 7700/7600, it will likely set up a retest of the year-to-date 8047 high.

FTSE daily chart