FTSE 100, USD/JPY Forecast: Two trades to watch

FTSE eases despite inflation unexpectedly holding steady

The FTSE is little changed as investors digest softer-than-expected UK inflation data ahead of Thursday's Bank of England rate decision, alongside falling energy prices.

Data showed UK inflation unexpectedly remained unchanged at 2.8% year-on-year in May, below expectations for a rise to 3.0%, suggesting price pressures were easing even before the recent collapse in oil prices following the U.S.-Iran peace agreement.

On a monthly basis, CPI rose 0.2%, down from 0.7% in April and below forecasts of 0.4%. Core CPI, which excludes more volatile components such as food and fuel, rose to 2.6% from 2.5%, but remained below expectations of 2.7%.

Delving deeper into the figures, falling food prices helped offset higher airfares and petrol prices. Meanwhile, service sector inflation rose to 3.7%, slightly above expectations, pointing to sticky domestic inflationary pressures.

Even so, the broader picture supports the Bank of England's wait-and-see approach. Softer inflation, a weakening labour market and a recent contraction in GDP reduce the need for further policy tightening, particularly as falling oil prices should ease inflation pressures in the months ahead.

Brent crude has fallen to around $80 per barrel, a three-month low, following the preliminary U.S.-Iran agreement and expected reopening of the Strait of Hormuz. Lower energy prices should eventually feed through to lower fuel and transport costs across the economy.

The market scaling back expectations for further BoE tightening has helped rate-sensitive sectors such as housebuilders outperform. Meanwhile, energy stocks are under pressure from falling oil prices, while utilities have also weakened.

Looking ahead, attention turns to the FOMC decision later today. A more hawkish-than-expected Federal Reserve could support the U.S. dollar and weigh on GBP/USD, which may benefit the multinational-heavy FTSE 100 through overseas earnings translation. However, higher global bond yields could also limit gains in broader equity markets.

FTSE Forecast – Technical Analysis

The FTSE continues to trade within a descending triangle pattern. The index recently rebounded from support around 10,170, recovering above the 50-day SMA and testing falling trendline resistance.

A break above the trendline would weaken the bearish pattern and a move above 10,570, the June high, would create a higher high, opening the door towards 10,725, the April peak.

On the downside, initial support can be seen at the 50-day SMA around 10,400. A break below 10,170 would create a lower low and expose the 200-day SMA at 10,000.

USD/JPY drifts lower ahead of the FOMC rate decision

USD/JPY is drifting lower towards the 160.00 level as traders await the Federal Reserve's interest rate decision under new Chair Kevin Warsh later today.

The Fed is widely expected to leave rates unchanged at 3.50%-3.75%. However, attention will focus on the policy statement, updated economic projections and the dot plot for clues regarding the outlook for U.S. interest rates.

The FOMC decision comes amid an improving backdrop as falling oil prices and the prospect of a lasting U.S.-Iran agreement have lowered inflationary worries. However, U.S. inflation remains elevated at 4.2%, while the labour market continues to show resilience.

Markets are currently pricing in the possibility of a Fed rate hike later this year. If Warsh does not push back against those expectations, investors may interpret that as a hawkish signal, supporting the U.S. dollar. Conversely, if he does push back, then this could raise questions about his credibility as inflation is double the Fed’s target level.

This highlights the delicate balancing act facing the new Fed Chair in his first meeting, having been selected by Trump who has been vocal about wanting rate cuts.

The decision comes shortly after the Bank of Japan raised interest rates by 25 basis points to 1%, the highest level since 1995. However, the move had little impact on markets as it was largely anticipated. The yen remains weak near 160 per dollar and the Nikkei continues to trade close to record highs.

The pair's proximity to 160 keeps investors alert to the possibility of intervention from Japanese authorities, who have previously acted to support the currency around these levels.

USD/JPY Forecast – Technical Analysis

USD/JPY continues to trade above its rising trendline and above both the 50-day and 200-day SMAs, keeping the broader uptrend intact.

However, momentum is slowing, with a bearish RSI divergence emerging as price tests resistance around 160.60. While not a reversal signal on its own, it suggests upside momentum is weakening despite higher highs in price.

Buyers need to break above 160.70, the 2025 high, to bring 162.00 into focus, the 2024 peak.

On the downside, support is seen around 160.00 and the 20-day SMA. Below here, the 50-day SMA near 159.00 comes into focus, followed by 158.00 and rising trendline support.