European indices ease from record highs as BoE rate decision looms

European stocks react to trade war fears

European stocks fell from record highs overnight on fears that United States (US) President Donald Trump's tariff announcement over the weekend was the opening salvo in a trade war.

Tariff tensions ease with Mexico and Canada

However, trade war fears have abated after President Trump agreed to postpone tariffs on Mexico and Canada after both countries agreed to reinforce their borders to help curb the flow of illegal drugs.

The suspension of tariffs on Mexico and Canada highlights the cycle we have entered: tariff announcements are followed by calls and negotiations, declarations of victory, and then the cycle repeats.

Potential EU and UK tariffs

With Mexico and Canada potentially out of the crosshairs for the next few weeks, traders will be closely monitoring signs that Trump’s attention may shift to the European Union (EU) and the United Kingdom (UK).

Over the weekend, Trump noted that both regions could face tariffs, citing the EU's €300 billion surplus with the US as an 'atrocity'.

BoE interest rate decision

Date: Thursday, 6 February at 11.00pm AEDT

At its last meeting in December, the Monetary Policy Committee (MPC) voted by a majority of 6:3 to maintain the Official Bank interest rate at 4.75%. Three members preferred to reduce rates by 0.25% to 4.50%. The 'on hold' decision was in line with expectations after twelve-month consumer price index (CPI) increased to 2.6% in November from 1.7% in September.

In the lead-up to this week’s Bank of England (BoE) meeting, the annual headline inflation rate in the UK unexpectedly edged lower to 2.5% in December 2024 from 2.6% in November. More importantly, the annual core inflation rate decreased to 3.2% in December from 3.5% prior, marking the lowest reading since September.

Also displaying signs of cooling, the UK unemployment rate rose to 4.4% in November from September, the highest level since the three months ending in May.

These factors, combined with tepid growth, are expected to see the BoE cut rates this week by 25 basis points (bp) to 4.50%. It will be the BoE’s third rate cut in the easing cycle, which began in August 2024. The BoE is expected to deliver a total of 70 bp of rate cuts in 2025.

BoE Official Bank rate chart

FTSE 100 technical analysis

After a robust rally to the mid-May high of 8474, the FTSE 100 has spent the past six months consolidating gains within a bullish trend channel before breaking higher last month. The break higher was in line with our last European indices update in mid-December here in which we said:

‘A sustained break above the trend line resistance at 8370 - 8390, which comes from the highs of May, August, and October, and then above a band of horizontal resistance at 8400 - 8420, is needed to confirm that the correction in the FTSE is complete, and that the uptrend has resumed towards 8600.’

With our expectation of a push towards 8600 fulfilled, we take this opportunity to move to a more neutral bias and may look to rebuy a pullback to support at 8400/8380 pending signs of basing.

FTSE 100 daily chart

DAX 40 technical analysis

In our last European indices update in mid-December here, we noted the rally to the 20,500 area was overbought and said that ‘we suspect that after some consolidation, which involves a pullback towards 20,000, the DAX 40 can resume its uptrend towards 21,000 into year-end.’

While the rally in the DAX 40 found another gear into the end of last month trading to a high of 21,800, we wouldn’t be chasing it at these levels given it now appears well overbought. Instead, we would prefer to look for a corrective pull in the weeks ahead with a view to being a buyer, pending signs of basing.

DAX 40 daily chart

• _{Source: TradingView. The figures stated are as of 4 February 2025. 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.}