FTSE 100, EUR/USD Forecast: Two Trades to Watch

FTSE 100 falls post Fed & ahead of the BoE rate decision

• FTSE falls after a hawkish Federal Reserve
• Attention turns to the BoE’s rate decision
• FTSE trades between 200 sma and 7750

The FTSE, along with its European peers, is heading for a lower start as investors digest the Federal Reserve's hawkish skip and as investors look ahead to the BoE’s interest rate decision.

At 12:00 BST the Bank of England will announce its interest rate decision in what's likely to be the toughest decision that policymakers have had to take for years

At the start of this week, the market was pricing in a 90% probability that the central bank would hike rates. However, after yesterday's cooler-than-expected inflation, that probability fell to 50/50.

Signs of cooling inflation, along with evidence that the UK economy is slowing rapidly (July GDP -0.5% MoM, PMIs below 50), could prompt some policymakers to consider pausing rate hikes.

On the other side of the coin, with inflation still three times the BoE’s 2% target rate, oil prices rising, and record wage growth, the Bank of England is more likely to err on the side of caution and hike interest rates for the 15th straight meeting to 5.5%.

There is no press conference after the meeting, so investors will be looking at the statement and the minutes from the meeting for clarity over where interest rates could go from here.

Any sense that the BoE has reached peak rates could pull the pound lower, which would be good news for the multinationals on the FTSE100 due to a more beneficial exchange rate. Housebuilders could also find support from the prospect of a more attractive mortgage market with lower rates.

Perhaps the risk is that the Bank of England presses on with its hawkish stance in order to avoid losing the momentum that has been built across 15 meetings of hikes. A hawkish-sounding central bank could lift the pound, which could be a headwind for the FTSE.

FTSE 100 forecast – technical analysis

The FTSE once again found support on the 200 sma but ran into resistance at 7750 for a second time this week. The RSI supports further gains while it remains out of overbought territory.

Buyers will need to break above 7750 to bring 7800, the psychological level and 7820, the May high, into play.

Meanwhile, support can be seen at 7630 the 200 sma, and the weekly low. A break below here exposes the 20 sma at 7550.

EUR/USD tests 1.0630 after the Fed’s hawkish skip

• Federal Reserve left rates unchanged
• Rates are projected to stay higher for longer
• EUR/USD tests support at 1.0630

EUR/USD has fallen for a third straight day, dropping to a six-month low, towards 1.06 after the Federal Reserve projected another interest rate hike this year.

The USD is tracking US treasury yields higher after the Federal Reserve left interest rates unchanged at a 22-year high of 5.25% to 5.5% but pointed to higher rates for longer.

The updated quarterly projection showed that 12 of the 19 officials favoured another rate hike this year, highlighting the Fed’s determination to tame inflation. Meanwhile, the Fed also projected 50 basis points less easing in 2024. In other words, interest rates are going higher this year and staying higher for longer next year, lifting the USD.

This is in contrast to the ECB, which raised interest rates in September but also hinted that that could be the last interest rate hike in this hiking cycle.

Signs of an economic slowdown in the eurozone and cooling inflation see the market doubting whether the ECB will continue to tighten monetary policy.

Looking ahead, eurozone consumer confidence data is due to be released and is expected to deteriorate to -16.5 in September, down from -16. Softer consumer confidence often goes hand in hand with weaker consumer spending and a weaker economic outlook.

ECB president Christine Lagarde is also due to speak later today. Investors will be looking for clues over the future path of interest rates after ECB members have recently given mixed messages.

EUR/USD forecast – technical analysis

EUR/USD  has been trending lower since the end of July. The price is testing strong support at 1.0630, the May low. The RSI supports further downside.

Sellers will look to break down 1.0630 to bring 1.0520 the Match low into focus.

Any recovery will need to rise above 1.0740 the weekly higher, to test resistance at 1.0770, last week’s high, ahead of 1.08 the falling trendline resistance.