European indices: FTSE rallies as BoE rate cut approaches

FTSE begins the week on a strong note

The United Kingdom's (UK's) FTSE 100 started the week on a strong footing, bolstered by the upcoming US presidential election and the possibility of an interest rate cut by the Bank of England (BoE) later this week.

Despite this initial optimism, the FTSE still faces the task of recovering from last week's UK budget, which unsettled UK currency, bond, and stock markets.

Government borrowing takes centre stage

Contrary to expectations for fiscal restraint, the UK government announced an additional £30 billion in borrowing over five years. This approach involves aggressive front-loading, with borrowing expected to increase by £40 billion in 2024 - 2025.

The budget has attracted media criticism, particularly around concerns that higher taxes may undermine business confidence, despite the plan's potential to support economic growth.

Additionally, increased government spending could lead the BoE to pause its rate-cutting cycle, creating a cautious sentiment across the market.

BoE interest rate decision

Date: Thursday, 7 November at 11.00pm AEDT

At its September meeting, the BoE maintained the interest rate at 5%, following a 25 basis points (bp) cut in August - the first cut in over four years.

The forward guidance remained cautiously inclined towards easing, with the minutes highlighting that 'a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.'

Further evidence of disinflation appeared last month as the annual core inflation rate dropped to 3.2% in September from 3.6%, marking the lowest level since September 2021. Similarly, the annual headline inflation rate decreased to 1.7% from 2.2% over the previous months.

These milder inflation readings have led the UK rates market to price in a 93% probability that the BoE will cut rates on Thursday to 4.75%. It will be important to see how the BoE incorporates last week's budget into its forecasts, with the market currently expecting no further rate cuts at the December meeting.

BoE official bank rate

FTSE technical analysis

Following a strong rally to the mid-May high of 8474, the FTSE has consolidated over the past six months, largely above support at 8100 and below resistance at 8400.

A sustained break above resistance at 8400 - 8420, stemming from the highs in August and October, is required to confirm that the correction is complete and that the uptrend towards 8600 has resumed.

If the FTSE remains below resistance at 8400 -8420, further sideways price action is possible, including a retest of the 200-day moving average of 8089, supported by last week's 8171 low.

FTSE daily chart

DAX technical analysis

In late September, the DAX 40 surpassed resistance at 19,000, setting the stage for a rally to the October high of 19,674.

The retracement from the 19,674 high has so far held support at around 19,000, and as it continues to do so, a retest of the 19,674 high is anticipated before a move towards 20,000.

A sustained break below support at 19,000 - 18,900 would indicate a deeper pullback unfolding towards the 200-day moving average at 18,294.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 5 November 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.}