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FTSE faces headwinds: eyes on UK's December inflation report after resilient GDP

Can FTSE extend December gains in catch-up with global peers?

Source: Bloomberg

Last week saw the FTSE close lower for a second consecutive week despite another resilient GDP print.

In November, the British economy expanded by 0.3%, rebounding from a -0.3% fall in October, and beating market forecasts for a rise of 0.2%. Despite the strongest GDP print in five months, the FTSE ended the week in the red, 0.84% lower at 7594. This week, the key event for the FTSE will be the inflation report for December.

In recent months, there have been encouraging signs that the Bank of England's aggressive rate hiking cycle has brought inflation under control. This has sparked pricing within the rates market of five 25 basis points BoE rate cuts in 2024, with the first expected in May.

What is expected from the UK's December inflation report?

In the UK, annual inflation fell to 3.9% in November, its lowest rate in two years, and below expectations of 4.4%. Core inflation fell for a fourth consecutive month to 5.1% in November from 5.7% in October.

For December, the market is looking for headline inflation to fall to 3.8%, a monumental achievement given that 12 months ago, inflation was 10.5%. The decrease is due to lower energy and fuel prices.

Core CPI is expected to fall to 4.9% YoY from 5.1%, supported by seasonal factors such as airfares. Presuming the numbers come in as expected, it should enable the BoE to sound more neutral in its guidance during the opening months of 2024.

UK CPI chart

Source: TradingView

FTSE technical analysis

In the final weeks of 2023, the FTSE broke above the 200-day moving average at 7567 and downtrend resistance at 7600 from the 8047 high before running into resistance near 7750.

Since then, the FTSE has retraced back to support, coming from the 200-day moving average, now at 7571, and the broken downtrend from the 8047 high, currently at 7570.

If the FTSE were to see a sustained break below 7570ish, a deeper retracement towards 7450 is likely with scope to range lows, 7300/7200. Aware that if the FTSE holds above support at 7570ish a rebound back towards 7750 is possible.

FTSE daily chart

Source: TradingView

DAX technical analysis

No change to our last update. The spike to a fresh all-time high, above 17,000 in early January, has the potential to become a Wave V (Elliott Wave) medium-term high.

A sustained break below support at 16,600/500 would increase the chances that a medium-term high is in place at the 17,123 high and warn that a deeper pullback towards the 200-day moving average at 15,967 is underway.

Conversely, an ability to remain above support at 16,600/500 would keep open a push to new highs before the corrective pullback we are expecting commences.

DAX daily chart

Source: TradingView
  • Source: TradingView. The figures stated are as of 16 January 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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