By: Zaye Capital Markets
The UK’s FTSE 100 index made a new record high today, and this happened ahead of an important economic event that traders pay very close attention to. Today, the Bank of England delivered its monetary policy decision, keeping the rates as expected, but the market experienced massive moves. Traders are now wondering what will happen to the FTSE 100 index, which has gone too far and too fast, especially since the Bank of England has left the rates unchanged.
Background
The Bank of England has been in a tight spot with respect to its monetary policy and the ongoing inflation situation in the country, which is adversely influencing its economy. Inflation in the UK used to be in the double digits, and to tame inflation, the Bank of England increased interest rates to a multi-decade high of 5.25%.
The equity market is generally addicted to dovish monetary policy. Because the rates are at their multi-decade high and the economy has been reeling with economic recessions, traders remain skeptical about the rise in the FTSE 100 index. This is because the FTSE 100 index should be trading lower as the Bank of England holds interest rates at a record level, and economic growth is flirting near recession levels.
Why The FTSE 100 Is Trading Higher
There are several reasons that the FTSE 100 index is trading higher. Firstly, consumer strength in the UK has been somewhat robust despite eye-popping inflation levels. Secondly, the recent increase in the FTSE 100 index has been mainly because bad news has been good news for the UK’s equity market. After all, traders anticipate that the Bank of England cannot afford to keep the rates higher for longer if the economic growth story does not support their narrative. In addition, there has been some improvement in the inflation rate, especially if you compare the inflation readings to those of a few months ago.
The Bank Of England’s Decision And The FTSE 100
The Bank of England left the interest rates unchanged today at 5.25%, but the FTSE 100 index experienced dramatic upside moves. This was mainly due to two more members of the MPC committee joining the dove camp, which thinks that the time has come for the Bank of England to make its moves and start cutting the rates.
The guilt market in the UK shows that the Bank of England could cut interest rates by 25 basis points during their next meeting, which will be in June. In addition, further positive sentiment among equity traders is also based on the fact that many anticipate the coming potential interest rate cut in June, which will not be the only cut we will see. Another interest rate of the same magnitude- 25 basis points- will push the FTSE 100 index higher.
What is expected now?
Traders expect the Bank of England to cut interest rates by 25 basis points in its June meeting. Later in the year, traders expect another rate cut of the same magnitude, meaning that the current 5.25% interest rate will drop to 4.75% by year-end.
The Caution
Traders need to be optimistic, but at the same time, they also need to be cautious with their approach. We think it is important because the Bank of England hasn’t shown satisfaction with inflation, but it is certainly not fully comfortable with saving that things are where they like them to be. This is because inflation in the country is still at 3.2%, whereas the bank’s target is 2%. Food inflation is unlikely to come down massively, and the situation is the same with services and products. The only thing likely to help both is energy prices, which have eased off from their peak. However, with geopolitical tensions remaining in place, we are unlikely to see a dramatic drop in the inflation rate, which would move the price towards 2%.
The Price Action
The UK 100’s chart (FTSE 100 chart) shows that bulls are in full control of the price action as the price is trading above the 50 and 100-day SMA on the 4-hour time frame. There is a potential that the price may drop, and it fills the gap, which is shown on the chart, and this could be the first area of support (demand zone). If the price falls further, we could see the price falling to the green line, the main support zone. The resistance is shown on the chart by resistance zone.
Published by: Martin De Juan
