The FTSE 100 has risen on Tuesday, extending yesterday’s rally, after hopes that the Bank of England will cut interest rates twice this year increased. This in turn weighed on the pound which has helped push shares higher. Market sentiment was also boosted as fears of an escalation in the Middle East conflict have eased. Later though, the release of stronger-than-expected UK preliminary Services PMI for April boosted the pound and influenced expectations of BoE rate cuts.
UK stock market hits record high
The UK stock market rose higher as shares were supported by hopes of BoE interest rate cuts and easing geopolitical tensions.
City investors expect two interest rate cuts this year, with the first fully priced in for August. Last Friday, the Bank of England deputy governor, Sir Dave Ramsden, speculated that UK inflation could drop lower than expected in the next three years, and remain close to the BoE’s 2% target. Headline inflation rate is currently at 3.2%.
The news has weighed on the pound which has weakened since November, and which has pushed up multinational companies share prices.
According to the financial services group Hargreaves Lansdown, UK market investor confidence was also up this month.
Sentiment had also improved as there wasn’t any further escalation in the Middle East after Israel’s attack on the Iranian city of Isfahan on Friday.
UK recovery weighs on shares
Later on Tuesday, the FTSE 100 dropped back from its earlier high on Tuesday morning, as the news that Britain’s economy is recovering from recession has weakened shares. The UK’s private sector has grown at its fastest rate since May 2023, according to a new survey of purchasing managers at UK businesses. S&P Global’s Flash UK PMI has increased to 54.0 this month, up from March’s 52.8 reading.
While the news is positive, the stronger-than-expected PMI report could allow the Bank of England to take more time before cutting interest rates as early as expected.
The PMI survey showed that the services sector reading increased to the highest level since May 2023. The services sector, which is the major driver of economic growth in the UK as it makes up about three-quarters of the economy, demonstrated significant growth this month, while the manufacturing sector contracted slightly this month. The services sector grew as new orders rose and hiring increased.
But investors are concerned that the UK’s recovery could push inflation higher. With robust services sector wage growth and growing material and transportation costs in the manufacturing sector, the market is worried that the Bank of England may adopt a more cautious stance when it comes to interest rates.
Markets already began viewing the June rate cut as highly unlikely and with today’s data, expectations for an August rate cut have now increased.
Chris Williamson, chief business economist at S&P Global Market Intelligence explained that the British economy is showing signs of improvement, but further data was necessary to confirm that the British economy was fully out of the woods. He noted:
“Early PMI survey data for April indicate that the UK economy’s recovery from recession last year continued to gain momentum. Improved growth in the service sector offset a renewed downturn in manufacturing to propel overall business growth to the fastest for nearly a year, indicating that GDP is rising at a quarterly rate of 0.4% after a 0.3% gain in the first quarter. We will find out next month whether the UK has officially escaped recession, when the GDP figures for January-March are released. The economy shrank slightly in the third and fourth quarters of 2023, which triggered a shallow technical recession.”
The better-than-expected UK services PMI lifted the pound. In the meantime, any speculation about more aggressive policy easing by the Bank of England could weigh on the pound. With expectations that the BoE will pivot to interest rate cuts sooner than the Fed, the near-term outlook for the British currency appears vulnerable.