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

FTSE 100 falls after sticky inflation, weak China GDP

UK CPI rose to 4% vs 3.8% expected
China GDP rose to 5.2% vs 5.3% expected
FTSE 100 tests 7450 support

The FTSE 100, along with its European peers, is set for a weaker open as investors reassess the likelihood of early interest rate cuts from the major central banks and after Chinese GDP data.

UK inflation data came in hotter than expected, with an unexpected rise to 4% YoY, up from 3.9% YoY. Meanwhile, core inflation unexpectedly remained unchanged at 5.1%.

The hotter-than-expected inflation has seen traders pare back BoE rate cuts but bets for 2024. The market is no longer fully pricing in five rate-cut bets by the Bank of England this year, pulling back rate-cut expectations to around 119 basis points, down from 131 basis points prior to the data. Expectations for a May interest rate cut have eased to 15 basis points, which is still above the 50% expectation for a cut.

The data comes as central bankers have been pushing back against interest rate cut expectations.

Overnight Fed Governor Christopher Waller’s hawkish comments downplayed the need for an early rate cut, which is also weighed on market sentiment.

Meanwhile, resource stocks in the FTSE could come under pressure after China's GDP grew by less than expected in Q4, at 5.2%, hitting Beijing's target but coming in below forecasts of 5.3%. Expectations of a strong post-COVID recovery have fizzled.

FTSE 100 forecast – technical analysis

FTSE 100 has fallen aggressively through its rising trendline dating back to late October and its 100 SMA, while the RSI has plunged lower below 50, keeping sellers optimistic of further downside.

Sellers need to take out support at 7450 to open the door to support at 7400, a level that has capped losses on several occasions across the year.

Should 7450 hold, buyers will need to rise above 7550, the round number ahead of 7575, the 200 SMA, and the rising trendline support.

EUR/USD falls on USD strength ahead of Eurozone CPI, US retail sales

Eurozone CPI is expected to confirm 2.9% vs 2.4% previously
Hawkish Fed comments boosts USD to a monthly high
US retail sales expected to rise to 0.4% vs 0.3%
EUR/USD is trading flat below 1.09 after recovering from losses overnight.

Comments From ECB president Christine Lagarde have helped support the euro. Christine Lagarde said that the ECB will probably cut interest rates in the summer as she confirmed that policymakers are on the right path in their fight to control inflation. However, she did add that the central bank remains data-dependent, and there is a level of uncertainty surrounding some indicators. These comments were made just ahead of the quiet period that precedes the ECB monetary policy meeting and also come after mixed messages from ECB policymakers at the World Economic Forum in Davos, Switzerland. The summer date is later than market bets of a cut as soon as April, lifting the EUR.

Attention is now turning to eurozone inflation figures, which are expected to confirm the preliminary rating of 2.9% YoY in December, up from 2.4% in November. While inflation is expected to have ticked higher, the broad trajectory is for inflation to continue cooling.

Meanwhile, the USD had risen to a monthly high versus its major peers after hawkish comments from Federal Reserve Governor Fed Christopher Waller who played down the need for a rate cut soon.

Attention will now turn to US retail sales, which are expected to rise 0.4% MoM, up from 0.3%, with strong sales highlighting the resilience of the US economy despite interest rates being at a 22-year high. Stronger than forecast retail sales could see investors push back Fed rate cut bets further lifting the dollar.

EUR/USD forecast – technical analysis

EUR/USD rebounded lower from the upper band of the rising channel in late December and is now testing support on the lower band of the channel around 1.0870. A break below here exposes the 200 SMA at 1.0840, and south of this support is 1.0760, the 100 SMA, and the early November high and early December low.

On the upside, buyers will look for a rise above 1.095, yesterday’s high, to extend gains above the 20 SMA at 1.0970, ahead of 1.10 at the psychological level.

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