UK100 Upbeat as Inflation Surprised to the Downside Ahead of the BoE Decision

  • UK100
    (${instrument.percentChange}%)

UK100 Analysis

Headline Inflation ticked down to 6.7% y/y in August, despite rising oil prices, in the smallest increase since March 2022. Core CPI, which excludes food, energy, alcohol and tobacco prices, decelerated markedly to 6.2% y/y.

The Bank of England expects inflation to fall "significantly further" [1] and today's downside beat will be welcome, after multiple upside surprises. The data comes just a day ahead of Thursday's monetary policy decision and will give policymakers some breathing room.

They have been hiking non-stop since December 2021, with every new move creating concerns for further economic slowdown and for sparking a mortgage crisis. The UK economy shrunk by 0.5% m/m in July, services PMI contracted last month and mortgages in arrears rose 28.8 y/y in Q2, according to last week's report by the FCA [2]. These factors create apprehension for further tightening and Governor Bailey recently indicated that the end is near, saying that they now "are much nearer now to the top of the cycle". [3]

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It remains to be seen whether today's CPI report is enough for the BoE to pause on Thursday, but gives it a chance to shift to a more dovish rhetoric and potentially prevent it from hiking past that. However, inflation remains highs and is not projected to fall below the 2% target for another couple of years. At the same time, historically high pay growth feeds a wage-price spiral and last week's report showed further increase in weekly earnings, to 8.5% in the May-July period.

UK100 runs a profitable month and jumped today on the soft CPI data, following Tuesday's slide. It is in the driver's seat and can set higher highs (7,758), but tackling 7,993 has a higher degree of difficulty. On the other hand, caution may prevail ahead of the BOE, which will determine the next leg of the move. With more tightening in play,there is scope for a pullback, but strong catalyst will be required for a breach of the pivotal 7,515-7,433 region.

Nikos Tzabouras

Senior Financial Editorial Writer

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 20 Sep 2023 https://www.bankofengland.co.uk/monetary-policy-report/2023/august-2023

2

Retrieved 20 Sep 2023 https://www.fca.org.uk/data/commentary-mortgage-lending-statistics-q2-2023

3

Retrieved 21 Jun 2024 https://parliamentlive.tv/event/index/a874d801-1604-4242-a466-ed33f21019c8

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