European indices: DAX and FTSE cautious ahead of UK inflation data and BoE decision

European markets begin week with uncertainty

European equities began the new week with mixed results overnight. The DAX 40 slipped by 0.4%, reflecting a cautious sentiment across Europe following last week’s impressive 2% rally.

Meanwhile, the FTSE 100 closed slightly in the green, with all eyes on this week’s critical interest rate meetings from the US Federal Reserve (Fed) and the Bank of England (BoE).

UK inflation data ahead of BoE decision

Setting the stage for the BoE’s decision will be the UK inflation data, set to be released Wednesday night. Headline inflation in the UK is forecast to remain steady at 2.2% year-over-year (YoY), while core inflation is anticipated to increase slightly to 3.5% YoY from 3.3%. However, the main concern for future BoE rate cuts is services inflation, which is expected to rise by 0.5% to 5.5% YoY.

What is expected from the BoE interest rate meeting?

Date: Thursday, 19 September at 9.00pm AEST

In August, the BoE voted 5-4 to cut its bank rate by 25 basis points (bp) to 5%. The language was notably cautious, leaving the speed and timing of any future rate reductions uncertain and lacking a clear commitment to further easing. The meeting minutes indicated that “it is now appropriate to reduce slightly the degree of policy restrictiveness.”

The forward guidance contained in the last paragraph of the accompanying statement noted that “monetary policy would need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further.”

This week, the BoE is expected to keep rates steady at 5%. Looking ahead, the rates market is pricing in a full 25 bp cut in November and another in December, which would see the BoE official bank rate end the year at 4.50%. Policymakers' guidance will be closely scrutinised, and if they maintain their current position of keeping rates restrictive, it might reduce expectations for rate cuts into year-end.

BoE official bank rate chart

FTSE technical analysis

After peaking at the mid-May high of 8474, the FTSE spent the better part of two months range-trading between 8300 and 8100 before dipping to its early August 7915 low. We hold the view that the dip to 7915 was part of a correction within an uptrend.

A sustained break above the downtrend resistance at 8360 and then above resistance at 8400 to 8420, coming from the highs of August, is needed to confirm that the correction is complete and that the uptrend has resumed towards 8600.

While the FTSE remains below resistance at 8400 to 8420, further sideways price action is possible, with the 200-day moving average of 7973 and the 7915 low of early August set to provide important support if tested.

FTSE daily chart

DAX technical analysis

In last week’s update, we stated that the pullback in the DAX from the 18,990 high would likely deepen towards initial support at 18,000, with scope down to the 200-day moving average at 17,787. While the DAX pullback fell short of these targets, the subsequent rebound has not advanced far enough to change our view.

As long as the DAX remains below resistance at 19,000, we expect the correction to continue with potential to deepen towards support at 18,000 to 17,800, which includes the 200-day moving average now at 17,845.

A sustained break above 19,000 would confirm that the correction is complete, and the uptrend has resumed towards 19,500.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 17 September 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.}