By ForexTime
Looking at the price charts, the UK100_m index ascent is significant, given that it’s gone above several notable price levels:
NOTE: The UK100_m tracks the FTSE 100 index (the benchmark used to measure the performance of blue-chip UK stocks).
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The UK’s consumer price index (CPI) measures headline inflation – the change in prices that UK consumers pay for goods and services.
The CPI rose by 7.9% in June 2023 compared to June 2022 (year-on-year).
This is the first time that the headline CPI number has dropped below the 8% mark since March 2022!
This shows that UK inflation is slowing noticeably, 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.
Markets have now greatly reduced their bets for future rate hikes by the Bank of England (BOE).
Note that the BOE has already raised its benchmark rate by 490 basis points since December 2021.
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.
The aim for these rate hikes is to subdue UK inflation.
And judging by today’s data release, it appears to be working.
Looking ahead, here’s what markets are predicting at the time of writing as for the BOE’s next moves:
Compare the above odds with what markets had predicted before today’s UK CPI data announcements:
Hence, with the slashing of the odds surrounding BOE rate hikes, no surprise that the British Pound is weaker today against all of its G10 peers, except for the Japanese Yen:
NOTE: A currency tends to weaken when markets expect that interest rates in that country won’t/can’t move much higher.
Note that British Pound has an inverse relationship with the UK100_m.
That means that when GBP weakens, then the UK100_m tends to strengthen, and vice versa.
Consider this:
Generally speaking, this inverse relationship between GBPUSD and the UK100_m has shown up 92% of the time on a 3-day rolling period over the past 30 years (according to Bloomberg’s correlation data).
This inverse relationship is due to the fact that companies listed on the FTSE 100 index gets more than 80% of their revenue collectively from outside of the UK, as of October 2022 according to FTSE Russell.
Hence, a weaker Sterling tends to translate into more earnings, in GBP terms, for these FTSE 100 companies.
No surprise then that the UK100_m is climbing higher as GBPUSD is falling.
With the forming of a new higher top today, four price targets can be calculated from there.
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 potential targets were established:
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 invalidating the long setup and triggering a sell signal.
However, from a fundamental perspective, UK100_m bulls (those hoping prices will move higher) would need a drastically weakening GBP, perhaps by way of a shocking announcement by the BOE that its rate hikes are to be soon halted, in order for the UK100_m to attain the psychologically-important 8,000 mark.
The above scenario is based on the FXTM Signals that are posted twice a day (before the London and New York sessions) for all FXTM clients.
This can be accessed from the MyFXTM profile, within the Trading Services section (left-hand bar).
ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com
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