FTSE Pushes Higher on Rate Cut Hopes & Weak Pound
UK Stocks hit an all-time high on Friday thanks to increased bets on rate cuts and a weakening pound that would expand exports.
- FTSE 100 touches 8.533 for first time
- Pound declines to 1.2100
- Lower interest rates seen as the cure
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The FTSE finished last week with a rally of 3%, its best 1-week performance since July 2023. Today’s open shows a more cautious market as investors and traders valuate just how strong the conditions are.
BoE Expectations Push FTSE Higher
The bond market has rallied over the past week, with yields back on the decline. After 10-year gilt yields reached 4.925%, the market is now back down to 4.690%.
The concern of rising borrowing costs had weighed on the FTSE’s performance. But it looks like the traders are gearing up for a rate cut.
LSEG data suggests that the market sees an 82% probability of a rate cut of 25 basis points in February. While for the year 2025, the market sees a total of 65 basis points.
Lower rates would certainly help a flailing economy. Last Friday’s Retail data showed a lesser than forecast increase. Of course, while usually that is negative for any stock market, the FTSE had a positive reaction.
FTSE Live Chart
The Pound and Borrowing Costs
The GBP/USD fell to 1.2100 on Friday before recovering some lost ground. Inflation in the UK came in weaker than forecast and help increase bets on faster action from the BoE.
US inflation also showed signs of weakness, but the US economy is expanding and healthy. This means the Fed may delay action, putting pressure on the pound.
So, borrowing costs have eased with the UK bond yields lower across the curve. This decline would be consolidated further if the BoE does take action in February as expected.
However, I see risk further ahead when effects of the national budget come into full swing. I see a decline in economic activity inevitable and net tax revenue falling.
The government will be obliged to issue larger amounts of bonds, pushing yields up. At the same time the UK is a net importer, and a weak pound is bound to create imported inflation.
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