BOE rate pause supports UK100_m

• UK100_m is the sole gainer among major peers
   
• BOE rate pause weakens GBP, lifts UK100_m
   
• UK100_m has inverse relationship with British Pound
   
• 75% of revenues for FTSE 100 companies come from outside the UK
   
• UK100_m upside may be capped by near-80% chance for one final BOE hike by March 2024

 

The UK100_m is in the green after the Bank of England chose not to raise UK interest rates today.

At the time of writing, this stock index is climbing past the psychologically-important 7700 level.

NOTE: The UK100_m tracks the underlying FTSE 100 (the benchmark index for the UK stock markets).

 

BOE decision: Explained

Just over an hour ago, the Bank of England decided to keep its benchmark bank rate unchanged at 5.25%.

This move essentially halts a series of 14 straight hikes since December 2021 – the most aggressive series of rate hikes in about three decades!

It appears that policymakers at the UK central bank are growing concerned about the already darkening economic outlook:

• July’s GDP shrank by a larger-than-expected 0.5% compared to June (month-on-month)
   
• The UK unemployment rate ticked up to 4.3% in July
   
• The August consumer price index (CPI) came in below market forecasts

No surprise then that the BOE today also lowered its GDP forecast for Q3 2023 down from 0.4% to 0.1%.

NOTE: Higher interest rates are intended to bring down inflation by destroying demand/cause more job losses/slow the economy down.

 

UK100_m is the sole gainer among major peers

This is in stark contrast to major European and Asian stocks indexes, as well as US stock futures, which are mostly in the red

After all, stock markets worldwide are feeling the brunt of yesterday’s Federal Reserve (Fed) policy decision.

The Fed conveyed to markets that it intends to keep US interest rates higher for longer, and also reduced the amount of expected rate cuts for 2024.

NOTE: Stocks generally prefer lower interest rates, or at least interest rates that are not moving much higher. And the UK100_m is no different.

 

Here's how the BOE's pause is supporting the UK100_m: the weaker Pound

Firstly, note that the benchmark UK stock index has an inverse relationship with the British Pound.

That means, when GBP goes down, the UK100_m tends to go up (and vice versa).

Over the past 10 years, take any given 10-day period, Bloomberg data shows GBP and FTSE 100 moving in opposite directions 55% of the time.

And that was certainly the case immediately following the BOE's rate decision today.

Also, markets tend to weaken the currency of the central bank that can't afford to push its interest rates much higher for fear of doing too much damage to its economy.

The Pound has dropped to its lowest levels since March following the BOE's pause today.

Furthermore, note that companies that are included in the benchmark FTSE 100 index, such as Shell, AstraZeneca, HSBC, Unilever, and BP, all garner about 75% of their revenue from outside of the UK.

Hence, a weaker Pound should translate into higher revenues for these FTSE 100 companies, which tends to drive their share prices and the benchmark index higher.

 

In short, BOE pause = weaker GBP = support for UK100_m

 

Still, UK100_m's near-term upside may be capped

However, note that this index's gains today were capped as markets hold on to hopes for perhaps one final BOE hike.

At the time of writing, markets are still predicting a 80% chance that the BOE will hike once more by 25 basis points, by March 2024.

 

Potential scenarios:

• UK100_m bulls (those hoping prices will move higher) will be awaiting signs that the UK economy is getting worse and Sterling moves even lower.
   
• UK100_m bears on the other hand will be hoping that GBP can stage a rebound if the UK economy proves more resilient than forecasted, allowing the BOE to press ahead with that final rate hike.

 

Key levels:

POTENTIAL RESISTANCE:

• 7763.7: immediate resistance in recent sessions; 78.6% Fibonacci level
   
• 7800: psychologically-important level; resisted gains in May 2023

 

POTENTIAL SUPPORT:

• 200-day simple moving average (SMA)
   
• 7600: psychologically-important level; resisted cycle high in August; key battleground between bulls and bears in June

 

uk100 Bank of England inflation economic outlook GBPUSD