KEY POINTS:
- The UK CPI data surprised to the downside across the board
- Traders are now betting on two more rate cuts in 2026
- The BoE is expected to cut by 25 bps tomorrow but could sound more dovish
- UK FTSE 100 surged on the soft inflation data as rate cuts boost the stock market
FUNDAMENTAL OVERVIEW
The UK FTSE 100 surged this morning following the surprisingly soft UK CPI data. The Office for National Statistics (ONS) noted that food and non-alcoholic beverages, and alcohol and tobacco made the largest downward contributions to the monthly change in both CPIH and CPI annual rates.
Even though food prices are generally volatile, several BoE members expressed significant concern lately that persistent food price increases could keep inflation sticky above 2% as households change their inflation expectations. Therefore, this should be good news for the central bank ahead of its monetary policy decision tomorrow where it's expected to cut the Bank Rate to 3.75%.
Given the soft UK employment and inflation data this week, the BoE might not only deliver the rate cut, but also a more dovish tone. The market has been expecting at least one more rate cut in 2026, but traders are now starting to bet on at least two more cuts next year.
For the stock market, lower interest rates and expected subsequent recovery in the economy are bullish drivers and should support the bullish momentum into new all-time highs, all else being equal.
UK FTSE 100 TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that FTSE 100 (CFD contract) bounced from a major trendline on November 21 when Fed’s Williams lift the global risk sentiment by endorsing a rate cut in December. We had some rangebound price action since the first week of December, but following the soft UK CPI, the market is now breaking out to the upside.
The natural target for the buyers will be of course a new all-time high. The sellers, on the other hand, will wait for the price to reach the all-time high to position for a drop back into the trendline.
UK FTSE 100 TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see that we had a strong resistance zone around the 9760 level. The price broke out this morning, and the buyers piled in with more conviction to target new all-time highs.
The sellers will want to see the price falling back below the 9760 zone to step back in and position for a drop into the major trendline.
UK FTSE 100 TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we can see that the price already reached the upper bound of the average daily range for today. The price generally consolidates or pulls back in such cases.
If we get a pullback into the 9760 level, we can expect the buyers to step in with a defined risk below the zone to position for a rally into a new all-time high.
The sellers, on the other hand, will look for a break lower to pile in for a drop into the major trendline.
UPCOMING CATALYSTS
Tomorrow we have the BoE monetary policy decision and the US CPI, while on Friday we conclude the week with the UK Retail Sales data.
