UK100 Slumps as the Latest Inflation Report Keeps Pressure on the BoE for More Hikes

  • UK100
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UK100 Analysis

Tuesday's latest inflation data from the UK, showed a sharp and welcome deceleration to 8.7% y/y in April for the all-inclusive CPI, but the report was not encouraging. Headline CPI is still far from the central bank's 2% target, while the Core reading accelerated to 6.8% y/y - the biggest increase in thirty-one years.

The Bank of England had been raising rates non-stop since the December 2021 lift-off, in order to contain inflation, but has slowed the pace recently. Policymakers raised rates by 0.25% earlier this month and remained non-committal as to the next steps, but kept the door open to more hikes [1]. During Tuesday's Parliamentary hearings, Governor Bailey kept such prospects in play, saying "we are nearer to the peak than we were". [2]

The central bank is increasingly data-dependent, but yesterday's CPI report definitely maintains pressure for more policy firming, which sent UK100 into a nosedive, closing the day below the 38.2% Fibonacci of the March low/April high advance. This brings 7,420 into the spotlight but a breach may need fresh catalyst and the 2023 low is distant (7,202).

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The Relative Strength Index hit the most oversold levels since the 2023 low of March and UK100 tries to stabilize at the 20Days EMA and the 50% Fibonacci, which makes a recovery effort reasonable. However, a significant and sustained improvement in sentiment will be required for challenging the EMA200 (7,760-70). Daily closes below it could shift bias on the upside, but the close below the 38.2% Fibonacci does not bode well for the prospects of taking 7,933 out.

On the bright side, the UK economy has performed better than expected and the Bank of England had upgraded its forecasts, not expecting a recession any longer [1]. The International Monetary Fund (IMF) followed suit on Tuesday, now projecting GDP growth of 0.4% in 2023 (from 0.3% contraction forecast in April) [3]. The better performance may not offer much support to the UK100 though, since it enables the BOE to pursue a more aggressive stance.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 25 May 2023 https://www.bankofengland.co.uk/monetary-policy-report/2023/may-2023

2

Retrieved 25 May 2023 https://parliamentlive.tv/event/index/3399304d-c303-4b23-9d4a-2747591479a7

3

Retrieved 27 May 2023 https://www.imf.org/en/News/Articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission

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