FTSE 100 Forecast Boosted by CPI and Crude Rally Ahead of Elections

The FTSE 100 forecast has been positively influenced by recent economic and political developments. The UK’s inflation rate has dropped to the Bank of England’s 2% target, a key factor ahead of the central bank’s rate decision on Thursday. Although this drop in CPI is unlikely to boost Prime Minister Rishi Sunak’s ratings before the upcoming UK election, the market remains relatively stable despite the potential end of a Conservative government. Concerns about the looming French elections have had a far greater impact on risk appetite across Europe. Still, the lack of any further deterioration in risk appetite suggests investors are looking past the elections. The sharp recovery in oil prices is providing an additional boost to the FTSE forecast, with shares in BP and Shell both on the rise.

Key Factors for Investors This Week

UK investors are currently navigating several domestic challenges, with more economic data releases expected this week, including retail sales and PMI figures. The Bank of England’s rate decision on Thursday and the UK's elections on July 4th are also critical events to watch.

UK Election Uncertainty

The FTSE 100 forecast has been slightly impacted by the lead of the UK Labour Party in opinion polls. Despite Labour being perceived as less business-friendly than the Conservatives, the FTSE’s losses have been mild, and the pound has remained relatively stable. This stability is possibly due to Labour’s manifesto lacking major surprise policies. On the other hand, the Conservative Party has proposed tax cuts, including a 2% reduction in national insurance and the removal of stamp duty for first-time buyers on homes valued up to £425,000, which could be inflationary.

French Election Poses Greater Risk

Since we are discussing politics, let’s not forget about the looming French election on June 30, which arguably has a greater influence on the level of risk appetite across Europe, including the UK, than the UK’s own election.

Investors are concerned about the French election due to the unclear policies of a potential coalition government led by President Macron and far-right Prime Minister Jordan Bardella. Additionally, the European Commission is likely to place France in an Excessive Deficit Procedure, questioning its fiscal sustainability and adherence to EU rules, posing further market risks.

While European politics evolve gradually, recent elections indicate a shift towards border security and industrial policies, potentially prioritizing domestic agendas. So far, debt tensions have been mostly confined to France, but could spread to southern European countries.

A rightward shift in Europe could heighten market uncertainty, reducing its attractiveness to investors. This requires prompt action from European and national leaders to address these concerns.

UK CPI Cools, But BoE Unlikely to Cut Rates This Week

However, this week, macroeconomic factors might have a greater impact on UK assets’ volatility than politics. On, Thursday, we have the BoE policy decision and on Friday, retail sales and PMI data are expected to be released.

Ahead of the Bank of England's policy decision on Thursday, we saw UK inflation fall back earlier today to the BOE’s 2.0% target from 2.3% y/y in April. This which was bang in line with expectations, as too was the core measure of CPI which eased to 3.5% from 3.9% last. RPI measure of inflation was 3.0%, a touch lower than expected. PPI input was flat month on month, but PPI output fell 0.1% in May. Overall, this was a positive inflation report showing price pressures abating in line with analysts’ expectations.

The BoE will be relieved that for the first time in almost three years inflation has fallen to their 2% target, potentially paving the way for rate cuts this summer.

With wages and services inflation still around 6%, the fight against inflation continues, though.

Therefore, the BoE is unlikely to make a move yet. Nearly all of the 65 economists polled by Reuters anticipate a rate cut in August, with most expecting at least one more reduction this year.

Given that most economists expect a rate cut in August, this could immediately impact the GBP/USD negatively and the FTSE 100 forecast positively if the BoE hints at this during their announcement.

FTSE 100 Forecast: Technical Analysis

Source: TradingView.com

The FTSE has been in consolidation mode over the past 4-6 weeks. During this period, it has given back around 3-4% of its gains from a record peak it had reached in May. The index has managed to find some support this week though, with several bearish attempts to break below 8120 proving futile. Consequently, the FTSE remains comfortably above last year’s high at 8046, which remains the next major support level to watch, should we get a deeper pullback. But if the FTSE hangs around current levels or moves a bit higher by the close of play this week, it will have ended a 4-week losing run.

The bulls will take the positives from the recent consolidation. If it has done one thing, it has allowed the Relative Strength Index (RSI) to work off its ‘overbought’ conditions on all time frames. This means the FTSE is ready to start a new bull trend if macro conditions allow it, with traders not having to worry about the index being technically overbought.

The index faces short term resistance around 8,200 area where it has struggled in the last few days. A little higher around 8,220 area is where the bearish trend of its bull flag pattern converges with the 21-day exponential moving average. I would image a short squeeze rally could commence if we were to break above that area in the coming days. 

In summary…

The FTSE 100 forecast is influenced by a mix of political uncertainty and economic data. While the UK and French elections pose risks, the recent cooling of UK inflation and a potential oil price rally provide a positive outlook. Investors should watch key events this week, including the Bank of England’s rate decision and upcoming economic data releases, to gauge the FTSE’s next move.

By keeping a close eye on these developments, investors can better navigate the complexities of the market and capitalize on opportunities as they arise.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R