FTSE and Pound analysis: BoE not so dovish after Fed pivot

• FTSE analysis: UK stocks ease off from earlier highs on not-so-dovish BoE hold (5.25%)
• BoE key takeaway point: No pivot, still some way to go on inflation = tight policy for longer
• Pound analysis: GBP/USD extends post FOMC rally as BoE "finely balanced" decision saw three dissenters voted for 25bps hike

The key takeaway point from the Bank of England’s policy decision today was this: The MPC are still not sure they have done enough to tackle high inflation and are thus uncomfortable with market pricing of earlier-than-expected rate cuts. The indecisiveness may mean that UK interest rates might have to remain high for a bit longer than expected, causing more pain for consumers and businesses. But by keeping policy tight for longer, the chances of an economic recovery will diminish, which clouds the pound’s longer-term outlook. For now, it has shown an initial positive reaction. It is also worth wondering whether the market will believe the BoE’s commitment of keeping interest rates high for longer (they don’t usually). If we continue to see further signs of a weakening economy or disinflationary pressure accelerate, then this will quickly raise doubts on whether the BoE will follow through in their commitment to keeping policy tight for longer. The economic output in the UK is very soft and I think this should help to bring inflation back down towards the 2% target sooner than the BoE expects. Thus, the FTSE is likely to find fresh support after coming off its earlier highs, while some pound crosses like the GBP/JPY could start to fall back after its initial positive reaction. The GBP/USD is currently driven mostly by the USD, so this pair may have some more upside potential in the short-term given the dollar’s widespread weakness.

FTSE analysis: UK stocks off highs after BoE rate decision

The FTSE was up around 1.7% this morning, reaching its highest level since September, ahead of the Bank of England’s rate decision. It was finally joining the global stock market rally outside of China. Investors were already in a cheerful mood on Wall Street, and they rejoiced the dovish signals the Fed provided them on Wednesday, with the FOMC’s dot plots pointing to three rate cuts in 2024, and effectively ruling out further rate increases. That caused global stocks to extend their recent gains, while causing the dollar to slump. The fact that the FTSE jumped at the open on Thursday morning, while most GBP crosses fell, meant that traders were expecting to see a more dovish Bank of England today. But that’s not precisely what happened, as the BoE was a bit more hawkish. This caused the FTSE to come off its earlier highs and at the time of writing it was up 1%, which was still not bad. But it does highlight some disappointment and this was reflected in the FX markets with all pound crosses either extending their gains (most notably, the GBP/USD) or came off their lows (such as the likes of the GBP/JPY and GBP/NZD).

BoE in hawkish hold

The BoE’s decision to maintain interest rates at 5.25%, a level not seen in 15 years, came as no surprise. This decision reflects a delicate balance between concerns about lingering inflation and signs that the UK economy may be on the verge of a prolonged downturn. But what was surprising is the fact three members voted for a hike, when only 2 were expected to do so. You would have thought that after the dovish pivot from the Fed, the BoE would be a bit more dovish. However, in their eyes, there is still not enough evidence to suggest that the inflation is on a sustainable path towards their 2% target, even if they now see year-end CPI just below 4.50% compared to 4.75% previously.

Some of the key highlights from BoE statement:

• MPC members Greene, Haskel and Mann voted to raise rates by 25 bps
• The BoE’s decision was "finely balanced" again, as there’s “still some way to go on inflation”
• Policy will need to be sufficiently restrictive for sufficiently long period to get inflation to 2% target

Traders were already increasing their bets for interest-rate cuts next year, spurred by lacklustre data, most recently the disappointing monthly GDP data, all reinforcing the belief that policymakers cannot sustain tight monetary policy for too long.  

Fed pivot but will the ECB follow suit?

The BoE’s rate decision comes after the Federal Reserve maintained interest rates for the third consecutive meeting, but one that caused the dollar to sell-off and stocks to rally, after signalling a definitive end to its aggressive rate-hiking. The FOMC projected three rate cuts in the coming year. For the first time since March 2021, policymakers did not foresee any additional interest-rate increases in their projections. This shift in stance led to a drop in the yield on 10-year US Treasuries, falling below 4% for the first time since August, causing gold and silver to rally. This helped to propel precious metal miners in London today, with the leader board containing several miners.

Shortly, the European Central Bank will announce its own rate decision, and economists anticipate officials to maintain the current stance without making any changes. But similar to the Fed, it could be a dovish decision, which could provide European stocks fresh momentum.

FTSE technical analysis

The FTSE has now cleanly broken above its 200-day average and several resistance levels. The bulls will want to see a solid close today to confirm the bulls are in charge in light of the BoE’s disappointment. A close above the broken trend line would be ideal, and more so if the index settles above the October high of 7702. The next upside targets could be round levels such as 7800 and 7900. But there is no further obvious reference points until February’s all-time high of 8046. The next support levels, meanwhile, come in at 7650, followed by 7600.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R