European indices rise as softer UK inflation points to potential BoE rate cuts

UK inflation cools, boosting rate cut prospects

European indices gained overnight, supported by softer-than-expected UK inflation data, which has boosted the chances of a follow-up Bank of England (BoE) interest rate cut.

Last night’s inflation report showed the annual rate of headline inflation in the UK rose by 2.2% in July, up from 2% year-on-year (YoY) in June but below forecasts of 2.3%. Notably, the core inflation rate for July fell to 3.3% YoY, marking its lowest level since September 2021. This followed a 3.5% increase over the prior two months.

BoE rate cut momentum builds despite strong jobs data

At the BoE meeting in August, the BoE cut rates by 25 basis points (bp) to 5.00% on a close 5-4 vote. The accompanying messaging from the BoE was cautious in terms of its forward guidance around the speed and timing of future rate cuts.

However, last night's cooler inflation numbers have increased the chance of back-to-back rate cuts from the BoE for the first time since the Global Financial Crisis. There are now 10 bp of rate cuts priced for its 19 September meeting and a cumulative 48 bp of rate cuts priced before year-end.

This is despite robust jobs data released earlier in the week, which showed the unemployment rate fell to 4.2% from April to June 2024, down from a two-and-a-half-year high of 4.4% in the previous period and below market forecasts of 4.5%.

FTSE technical analysis

After peaking at the mid-May high of 8474, the Financial Times Stock Exchange (FTSE) spent the better part of the past two months range-trading between 8300 and 8100 before last week's flush below 8000 to the 7915 low.

The FTSE’s swift rebound from the 7915 low and its return to its former range indicates that the sell-off to the 7915 low was part of a correction within an uptrend rather than the start of a new impulsive move lower.

Although we lack firm evidence that the correction is complete, we are willing to move to a weak positive bias, leaning against the support coming from last week’s 7915 low and the 200-day moving average at 7878.

FTSE daily chart

Source: TradingView Source: TradingView

DAX technical analysis

In the lead-up to the August sell-down, we held the view that the DAX had completed an Elliott Wave five rally from the October 14,630 low to the mid-May 18,892 high and had commenced a correction.

The dip to the 17,024 low last week was viewed as part of a correction within an uptrend. However, a sustained break above resistance at 18,000/18,100 is needed to increase confidence that the correction is complete and that the uptrend has resumed.

A break below 17,000 would warn that a deeper decline back towards 16,000 is underway.

DAX daily chart