FTSE 100 Weekly Look Ahead: Upside Breakout Dependent on BoE & Earnings

LOW VOLATILITY KEEPS FTSE 100 ELEVATED

As we enter the Summer period, volatility continues to drift lower as represent by the FTSE 100 volatility index (VFTSE) which is at the lowest level in over a month. Consequently, as volatility drops off, the FTSE 100 could see an extended move higher, indicated by the rising correlation between the two.

FTSE 100 VS. FTSE 100 VOLATILITY INDEX

UK EARNINGS IN FOCUS

Over the course of next week, eyes will be on the large banking names in the UK with Standard Chartered (Tue), Barclays (Thu) and RBS (Fri) providing an update on their latest financial results. Questions will be asked as to whether corporate profits continue to take a hit in the low interest rate environment. In terms of share price performance, major banks have underperformed the broader by around 5-10%. However, the outlook may be somewhat lifted provided the BoE raise rates on Thursday and signal a continue tightening of monetary policy. Elsewhere, index heavyweight BP will announce their earnings on Tuesday, which has outperformed the FTSE 100 by some 8%, following the surge in oil prices to 4yr highs on the back of geopolitical tensions.

FTSE 100 INFLUENCE

BANK OF ENGLAND QIR EXPECTED TO LEAD TO VOLATILE GBP REACTION

The Bank of England are expected to raise rates next week to 0.75% from 0.50% with OIS markets pricing in an 80% probability. However, the focus will be on whether the BoE will signal another hike in the near-term. Given the recent soft data points, the Bank of England are likely to remain data dependent and reiterate that tightening monetary policy will be gradual and limited. As such, a cautious stance by the Bank of England may be enough to lead to a sell-off in the Pound, consequently prompting a bid in the FTSE 100.

FTSE 100 PRICE CHART: DAILY TIME FRAME (MARCH-JULY 2018)

FTSE 100 remains supported above 7700, while the initial target for bulls is the weekly high at 7741 before a potential retest of the June highs at 7796. RSI indicators also suggesting bias is to the upside.