UK100_m soars on easing UK inflation

<p><strong>By <a href="http://investmacro.com/contributors/contributor-profile-forextime/">ForexTime</a></strong></p>
<ul>
<li><strong>UK100_m tracks FTSE 100 index which measures 100 largest UK stocks</strong></li>
<li><strong>Lower-than-expected UK inflation = lowered bets for BOE rate hikes = Pound falls</strong></li>
<li><strong>Weaker GBP improves earnings outlook for FTSE 100 companies, pushing UK100_m higher</strong></li>
<li><strong>Technical analysis points to 4 potential upside targets for UK100_m</strong></li>
</ul>
<p>&nbsp;</p>
<h3>The UK100_m has resurfaced above the psychologically-important 7500 level after today’s UK inflation data came in below market expectations.</h3>
<p>Looking at the price charts, the UK100_m index ascent is significant, given that it’s gone above several notable price levels:</p>
<ul>
<li>the upper bound of its downtrend since April (broken out of the multi-month downtrend)</li>
<li>a key Fibonacci level from its October 2022 – February 2023 ascent</li>
<li>its early-July cycle high of 7565.2</li>
</ul>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/UK100_mDaily.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="f70c6603-8139-4362-96d3-66a602a8af3e" data-src="/s3-static/users/user16/UK100_mDaily.png" /></p>
<p><em>NOTE: The UK100_m tracks the FTSE 100 index (the benchmark used to measure the performance of blue-chip UK stocks).</em></p>
<p>&nbsp;</p>
<h3><strong>Latest UK CPI: What you need to know</strong></h3>
<p>The UK’s consumer price index (CPI) measures <strong>headline inflation</strong> – the change in prices that UK consumers pay for goods and services.</p>
<p>The CPI rose by <strong>7.9%</strong> in June 2023 compared to June 2022 (year-on-year).</p>
<blockquote>
<h4><em>This is the first time that the headline CPI number has dropped below the 8% mark since March 2022!</em></h4>
</blockquote>
<ul>
<li>June’s 7.9% figure was also lower than the market’s forecast of 8.2%.</li>
<li>June’s CPI growth of 7.9% was also below May’s 8.7% year-on-year figure.</li>
</ul>
<p>This shows that UK inflation is <strong>slowing noticeably, </strong>compared to the double-digit figures posted on most months between July 2022 till March 2023, a period when the CPI peaked at 11.1% last October.</p>
<p>&nbsp;</p>
<h3><strong>What does the lower-than-expected CPI data mean for the BOE?</strong></h3>
<blockquote>
<h4><em>Markets have now greatly reduced their bets for future rate hikes by the Bank of England (BOE).</em></h4>
</blockquote>
<p>Note that the <strong>BOE </strong>has already raised its benchmark rate by <strong>490 basis points since December 2021.</strong></p>
<p>That’s the BOE’s most aggressive series of rate-hikes since the late-1980s: the same decade when UK CPI was also posting double-digit figures.</p>
<p><em>The aim for these rate hikes is to subdue UK inflation.</em></p>
<p>And judging by today’s data release, <strong>it appears to be working.</strong></p>
<p>&nbsp;</p>
<p><strong>Looking ahead, here’s what markets are predicting at the time of writing as for the BOE’s next moves:</strong></p>
<ul>
<li>a <strong>less-than-even (43.8%)</strong> chance of a larger <strong>50-basis point</strong> (bp) hike at the upcoming BOE rate decision due August 3rd.</li>
<li>a <strong>less-than-even </strong><strong>(44.7%)</strong> chance that the BOE can even proceed with 100-bps in hikes before UK interest rates <strong>peak at around 5.8%.</strong></li>
</ul>
<p>Compare the above odds with what markets had predicted <em>before</em> today’s UK CPI data announcements:</p>
<ul>
<li>69% chance of a 50-bps hike by the BOE in early August</li>
<li>fully expected a total of 100-bps in hikes by the BOE by May 2024, with a 1-in-3 chance of the total remaining hikes being 125 basis points to send the benchmark rate <strong>above 6%!</strong></li>
</ul>
<p>&nbsp;</p>
<p>Hence, with the slashing of the odds surrounding BOE rate hikes, no surprise that the <strong>British Pound is weaker today</strong> against all of its G10 peers, except for the Japanese Yen:</p>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/WCRS%20GBP%20vs%20G10%20-%2019%20July.png" alt="" width="1024" height="536" data-entity-type="file" data-entity-uuid="3e470d5b-a58d-46ab-b5bf-a459636a162e" data-src="/s3-static/users/user16/WCRS%20GBP%20vs%20G10%20-%2019%20July.png" /></p>
<p><em>NOTE: A currency tends to weaken when markets expect that interest rates in that country won’t/can’t move much higher. </em></p>
<p>&nbsp;</p>
<h3>GBPUSD has returned below the psychologically-important 1.300 mark.</h3>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/GBPUSDDaily_21.png" alt="" width="1024" height="768" data-entity-type="file" data-entity-uuid="33217405-97fd-4af6-a2a0-64c18a576d09" data-src="/s3-static/users/user16/GBPUSDDaily_21.png" /></p>
<p>&nbsp;</p>
<h3><strong>How does the Pound affect the UK100_m?</strong></h3>
<blockquote><p><em>Note that British Pound has an inverse relationship with the UK100_m.</em></p></blockquote>
<p>That means that when GBP weakens, then the UK100_m tends to strengthen, and vice versa.</p>
<p>Consider this:</p>
<ul>
<li><strong>GBP is the second-best performing G10 currency against the US dollar so far in 2023.</strong><br />
GBPUSD has a <strong>year-to-date advance of over 7%</strong>, even after today’s declines.</li>
<li>On the other hand, the <strong>FTSE 100 index is a clear laggard</strong> among benchmark stock indices in developed markets.<br />
The<strong> FTSE 100</strong> has climbed a “mere”<strong> 8.7%</strong> so far this year, while the likes of the<strong> S&amp;P 500,</strong> the<strong> Euro Stoxx 50,</strong> and the <strong>Nikkei 225</strong> have all risen by <strong>double-digits</strong> so far this year!</li>
</ul>
<p>Generally speaking, this inverse relationship between GBPUSD and the UK100_m has shown up <strong>92%</strong> of the time on a <strong>3-day rolling period</strong> over <strong>the past 30 years</strong> (according to Bloomberg’s correlation data).</p>
<p>&nbsp;</p>
<p>This inverse relationship is due to the fact that <strong>companies listed on the FTSE 100 index</strong> gets more than <strong>80% of their revenue collectively from outside of the UK,</strong> as of October 2022 according to FTSE Russell.</p>
<blockquote>
<h4><em>Hence, a weaker Sterling tends to translate into more earnings, in GBP terms, for these FTSE 100 companies.</em></h4>
</blockquote>
<p>No surprise then that the UK100_m is climbing higher as GBPUSD is falling.</p>
<p>&nbsp;</p>
<p>&nbsp;</p>
<h3><strong>Technical Perspective: What’s next for UK100_m?</strong></h3>
<p><span lang="EN-US" xml:lang="EN-US">With the forming of a <strong>new higher top</strong> today, <strong>four price targets</strong> can be calculated from there. </span></p>
<p><span lang="EN-US" xml:lang="EN-US">Attaching the Fibonacci tool to the top at 7565.3 price level and dragging it to a bottom that formed on 7 July at 7222.3, the following <strong>potential </strong></span><span lang="EN-US" xml:lang="EN-US"><strong>targets</strong> were established:</span></p>
<ul>
<li><span lang="EN-US" xml:lang="EN-US">Potential Target 1: <strong>7702.5</strong></span></li>
<li><span lang="EN-US" xml:lang="EN-US">Potential Target 2: <strong>7771.1</strong></span></li>
<li><span lang="EN-US" xml:lang="EN-US">Potential Target 3: <strong>7908.3</strong></span></li>
<li><span lang="EN-US" xml:lang="EN-US">Potential Target 4: <strong>8079.8</strong></span></li>
</ul>
<p><span lang="EN-US" xml:lang="EN-US">If the bearish momentum exceeds the bullish, this could cause the price to sharply depreciate below the critical support level that formed on 7 July at 7222.3, consequently <em>invalidating </em>the long setup and triggering a sell signal.</span></p>
<blockquote><p><em>However, from a <strong>fundamental perspective, UK100_m bulls</strong> (those hoping prices will move higher) would <strong>need a drastically weakening GBP,</strong> perhaps by way of a shocking announcement by the BOE that its rate hikes are to be soon halted, in order for the <strong>UK100_m to attain the psychologically-important 8,000 mark.</strong></em></p></blockquote>
<p><img decoding="async" loading="lazy" class=" lazyloaded" src="https://www.forextime.com/s3-static/users/user16/Theunis%20-%20UK100.png" alt="" width="1000" height="800" data-entity-type="file" data-entity-uuid="b2510e30-3a3a-4b7b-b12a-581f42dd965d" data-src="/s3-static/users/user16/Theunis%20-%20UK100.png" /></p>
<p>&nbsp;</p>
<p><span lang="EN-US" xml:lang="EN-US"><strong>The above scenario is based on the FXTM Signals </strong>that are posted twice a day (before the London and New York sessions) for all FXTM clients.</span></p>
<p><span lang="EN-US" xml:lang="EN-US">This can be accessed from the <a href="https://www.forextime.com/login">MyFXTM profile</a>, within the Trading Services section (left-hand bar). </span></p>
<hr />
<p><img decoding="async" loading="lazy" class="size-full wp-image-54242 alignleft" src="https://www.investmacro.com/articles-analysis/wp-content/uploads/2014/07/Forex-Time-Logo.png" alt="Forex-Time-Logo" width="262" height="90" /><strong>Article by <span><a href="https://www.investmacro.com/contributors/contributor-profile-forextime/">ForexTime</a></span></strong></p>
<p><strong>ForexTime Ltd (FXTM)</strong> is an award winning international online forex broker regulated by CySEC 185/12 <a href="http://www.forextime.com" target="_blank" rel="noopener">www.forextime.com</a></p>