FTSE outlook: BoE meeting takes center stage in European market watch

They say good things come to those who wait—a saying that resonates well with the price action in the FTSE in 2024. After a prolonged period of stagnation, the FTSE finally sprung to life in the second half of April. It has since added more than 5%, trading to record highs when many of its global peers have entered a period of consolidation below their respective record highs.

The FTSE charting its own course at its own time is not unusual. It is viewed as a defensive benchmark, and often outperforms during periods of uncertainty when investors don't feel as confident about the outlook and seek the haven of safer harbours. The FTSE's sector composition, with a heavy weighting of financial, commodity, and energy-type stocks, has proven to be a boon recently. The latter two have benefited from higher prices, spurred by the recent improvement in Chinese economic data.

On top of this, the FTSE is benefitting from signs that the UK economy's growth profile is steadily improving. Earlier this week, the S&P UK Construction PMI rose to 53 in April from 50.2 prior, for its strongest expansion since February 2023. This week’s highly anticipated Bank of England (BoE) meeting could pave the way for a potential interest rate cut as early as its next meeting in June, a move that could further fuel the FTSE’s outperformance.

BoE interest rate decision

Date: Thursday, 9 May at 9pm AEST

At its meeting in March, the BoE, as widely expected, kept rates unchanged at 5.25%. However, the vote split surprised with an 8-1 vote, as two members who had voted for hikes in February removed their hawkish dissent, while a third continued to vote for a 25bp cut. This was the first time there was no hawkish dissent for rate hikes since the BoE went on hold last September.

The forward guidance from February, when the BoE shifted to a neutral stance, did not change. The BoE stated it: "will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth, and services price inflation."

While the BoE will keep rates on hold this month at 5.25%, it will likely open the door to future rate cuts via dovish inflation projections and forward guidance. Ahead of the meeting, the interest rate market is pricing in a 45% chance of a 25 basis point (bp) rate cut at the BoE's meeting in June, with a full 25bp rate cut priced for August.

BoE official cash rate chart

DAX technical analysis

Our view from last week has not changed. The rally from the 17,626 low on April 19th is viewed as Wave B, or the second wave of a three-wave correction, currently unfolding from the 18567 high of early April.

The wave B should not exceed resistance in the 18,400/550 area and is expected to be followed by another leg lower (Wave C) towards the 17,500/300 support zone. If this decline plays out as expected, we will look closely for signs of basing in the 17,500/300 support area to establish longs.

Aware that if the DAX fails to turn lower and takes out the 18,567 high, it will invalidate our preferred wave count and open the way for it to push towards 18,000.

DAX daily chart

FTSE technical analysis

We have maintained a bullish stance in the FTSE since it broke above downtrend resistance in mid-March, coming from the February 2023, 8047 high. In last week's update, we said: “Providing the FTSE remains above support at 8,000 we continue to look for a test of 8250, with scope to 8400.”

After almost reaching our 8400 target and with the rally in FTSE now stretched and in extreme overbought territory, we feel the risks of a pullback are rising. We would suggest moving to a more neutral bias or tightening stops on longs with a view to buying a possible pullback after Thursday's BoE meeting.

FTSE daily chart

• ^{Source:Tradingview. The figures stated are as of 8 May 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}