The FTSE 100 index, also known as the Footsie index, failed to settle above previous highs and corrected lower. As a result, sentiment appears slightly negative today, possibly leading to a more significant correction from the strong resistance of 7,240 GBP.
Inflation slows but remains elevated.
This week’s inflation data released Wednesday showed that inflation has slowed marginally . Still, the overall trend remains higher, possibly prompting the Bank of England to start raising rides as soon as the next meeting.
The CPI inflation has slowed to 3.1% annually in September, down a notch from 3.2% in August. The core CPI also ticked lower and printed 2.9%, down from 3.1% previously. However, economists predict that inflation will continue rising as the energy crisis is far from over and supply chain distortions remain intact.
Sterling has jumped notably over the previous three weeks, rising from 1.34 to 1.38 against the Greenback. There usually is a negative correlation between the pound and the FTSE index. Should the GBP continue to strengthen, the equity index might decline from the mentioned resistance.
On the macro front, data released earlier by the Office for National Statistics showed UK public borrowing fell by almost half in the first six months of the financial year. It continued to recover from the impact of the Covid-19 pandemic.
However, Britain’s budget deficit soared last financial year to its highest since World War Two at 15% of GDP . Still, it is expected to halve this year due to the end of emergency economic support and more substantial tax revenues.
The coronavirus situation in the UK is deteriorating. The number of new cases and deaths has increased notably, prompting fears that new measures and lockdowns could be implemented over the winter to stop the spread.
In that scenario, it would most likely be negative for UK equities as the government would put many small businesses into a challenging situation again.
Daily chart points to further consolidation
Since June. the FTSE index has been stuck in a wide range and has not moved anywhere in more than six months . Therefore, the medium-term outlook remains neutral.
The Footsie needs to rise above the significant selling zone at previous highs in the 7,240 GBP zone. If successful, large stop-losses of short positions will be triggered, likely sending the index sharply higher in the initial reaction.
In that scenario, the Footsie might advance to the 7,400 – 7,600 GBP area, where the pre-COVID highs are located. However, please note that the FTSE index is the weakest among the major indices as it still trades below the February highs.
Alternatively, the support is seen near 7,150 – 7,160 GBP, followed by the the 50-day moving average near 7,110 GBP.