UK inflation seems to have peaked in October 2022 when it reached a multi-decade high of 11.1% and has since cooled off a notch to 10.5% in December

British economy and most popular index - FTSE 100, has been affected by various macroeconomic events recently. Bank of England decided on the interest rate the previous week. This week, UK economy's health will be examined on Friday, when GDP goes public. Some time ago, before the decision of BoE has been made, Markus Helsing (Quad Code) commented on the circumstances.

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UK economy snapshot - UK GDP as catalyst

Unsurprisingly, the Bank has to balance its actions on a tightrope as it tries to mitigate slowing down the economy at the expense of fighting inflation. UK inflation seems to have peaked in October 2022 when it reached a multi-decade high of 11.1% and has since cooled off a notch to 10.5% in December. Meanwhile, the 3-month GDP average growth up until November showed a contraction of 0.3%. On top of that, the International Monetary Fund(IMF) has just downgraded the UK growth forecast for 2023, predicting a contraction of 0.6% of GDP for the full year of 2023. December GDP due in February could be a game changer for the FTSE’s performance as a contraction could halt the upside and reverse its course. Unemployment on the other hand, has risen only marginally from a low of 3.5% in August to a flat 3.7% for October and November 2022.

Read next: It is extremely important that the British GDP report for Q4 at least coincided with the forecast | FXMAG.COM

Fed - The external factor

Lastly, the FTSE's rally coincided with the US dollar index’ large bearish correction from the all-time highs in September 2022 and S&P 500’s relief rally from recent lows. A large part of this can be attributed to the Fed’s previously anticipated slowing down in interest rate hikes, which has greatly impacted investor sentiment in a positive manner. As investors became more risk-on oriented, risky assets including stocks, indexes and commodities staged a recovery during the same period. So while it might seem BoE is holding most of the cards, the Fed could be playing an equally important role here too, in keeping investor sentiment positive and the risk appetite on.