Britain's main benchmark UK100 is the weakest European index today, losing more than 1%. The upcoming - likely hawkish - decision by the Bank of England by no means signals the end of tightening in the British economy. While it is uncertain whether rates will rise by 25 or 50 bps, the market will almost certainly have to swallow a higher 50 bps BoE hike - today or in August. Yesterday's reading indicated that UK inflation in May appears to have stabilized at excessively high levels. Core CPI was unchanged at 8.7% y/y - the market had expected 8.4% y/y. Also, the core CPI , which was expected to remain unchanged at 6.8% y/y, accelerated to 7.1% y/y - the highest level in 30 years.
The difficult situation could prompt the Bank of England to an extremely restrictive cycle if the BoE prioritizes the fight against inflation. In such a situation, the baseline scenario seems to be economic damage, which is generally not good for the performance of firms and consequently the stock market. With inflation anchored too high and a period of below-trend growth, a stagflationary scenario is a sizable threat to the British economy. As long as the labor market remains relatively strong, the market has no reason to be overly concerned, however, macro uncertainty has been reflected in the quotations of British indices recently.
Looking at the chart of FTSE (UK100) contracts, however, we see that the upward trend line is maintained although the index has dropped below the SMA200 (red line) indicating a possible further weakening of momentum. In addition, looking at the index's quotations since February, this year, we can juxtapose them with the technical formation of a rising wedge from which a breakout usually takes place at the bottom. RSI indicators near oversold and MACD confirm considerable weakness in the bulls - further decline without an upward correction would therefore have to be outright 'capitulation'. The market's reaction to the BoE minutes and decision may prove crucial.
