FTSE 100 Retreats as Sentiment Suffers on Fitch Downgrade and BoE Survey

• 7000 Psychological Level Still Remains Key.
• Bank of England Survey Indicates Potential for Prolonged Inflation Fight.
• A Return of Dollar Strength and Risk-Of Sentiment Could Result in a New YTD Low.

The FTSE 100 declined by 100-odd points in European trade, as Fitch became the latest rating agency to downgrade the credit outlook for UK government debt. Yesterday saw the index post marginal losses as Opec + announced a cut in oil production, which seemed to be interpreted as a negative in the global fight against inflation.

As the pound spiraled in September the FTSE initially remained resilient before finally breaking below the key psychological 7000 level and making a run for the YTD lows. We have rebounded back above the level which continues to look vulnerable as a combination of factors indicates the possibility of further downside.

The Bank of England’s recent survey meanwhile revealed an uptick in inflation expectations during September. The survey known as the ‘decision maker panel survey’ also indicated an uptick in cost pressures for the next 12 months which is expected to be passed on to consumers who are already dealing with unprecedented inflation. Executives also believe that inflation will not be close to the Bank of England’s target of 2% in the next three years, with their estimates resting closer to the 4.8% mark. If anything, the survey should serve as a reminder for the BoE that they have a long way to go to convince markets and executives alike that they will be able to rein in inflation and stimulate growth.

On the corporate front, Shell PLC (SHELI) slid 3% in European trade as it issued a warning around Q3 refining earnings. Imperial brands PLC (IMB) on the other hand posted gains of 4% as it announced its share buyback plans. The index could be in for a wild ride in Q4 as markets wait for clarity from the BoE on its plans for quantitative easing and government debt.

FTSE 100 Daily Chart – October 6, 2022

Source: TradingView

From a technical perspective, we have seen an aggressive bounce from our recent low of around 6775. The daily chart has seen a shift now as we have broken above the previous lower high, a sign of a potential bullish change in price action.

Yesterday’s daily candle closed as an inside bar bearish close which signals the potential for further downside. This is in contrast to price action which is indicative of the uncertainty prevalent in markets at the minute. In order to see a bullish push higher, we require a sustained break above the key 7000 level while a break below would open up the possibility of a new YTD low.

Key intraday levels that are worth watching:

Support Areas

Resistance Areas

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Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda