BoE's hawkish surprise: FTSE struggles as rate cut hopes fade

Last week's Bank of England (BoE) meeting delivered a more hawkish-than-expected outcome, just as the FTSE was building towards another attempt to break higher.

While the BoE kept rates on hold at 5.25% as expected and removed its tightening bias, several hawkish elements stood out. Two policymakers voted for another 25bp rate hike. The bank's latest inflation forecasts showed inflation above target during H2 2024 and 2025. The BoE reiterated that "monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target", dampening hopes of imminent rate cuts.

The UK rates market, which did have a first BoE 25bp rate cut priced for June and a total of 100bp of rate cuts priced for 2024, responded by pushing back expectations of a first cut until August and now has only three rate cuts priced for 2024.

To make matters worse, revised data overnight showed the UK's unemployment rate was at 3.9% in the three months to November, the lowest level since April last year and significantly below the initial print of 4.2%. Cooling in the labour market is necessary to relieve inflationary pressures, and to enable the BoE to cut rates.

UK unemployment chart

FTSE technical analysis

For the past eight months, the FTSE has been encapsulated below horizontal resistance at 7750ish and above support at 7200.

While the FTSE remains above the 200-day moving average at 7556, it remains positioned to set up another test of the horizontal and trendline resistance at 7730/60.

If the FTSE can see a sustained break above the aforementioned resistance band, it would warrant moving from a neutral bias to a bullish bias, looking for a test of the April 7936 high, with the scope to the 8047 high. Aware that while the FTSE remains below resistance at 7750ish, more range trading is likely.

FTSE daily chart

DAX technical analysis

In recent updates, we noted that due to the nature of the three-wave nature decline from the early Jan 17,123 high to the mid-Jan 16,464 low, it was likely a correction, and that the DAX should push to new highs in the 17,200/400 area.

While the DAX has yet to print a fresh cycle high, we wouldn’t be giving up on it just yet. Neither would we be chasing the market higher, as we remain of the view a 5-10% pullback is not too far away.

DAX daily chart

• _{Source: Tradingview. The figures stated are as of 6 February 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.}