Will the Bank of England’s idea of an earlier rate hike drag the FTSE 100 lower?

The FTSE 100 had an interesting reversal the previous week, just when it was looking poised to break below the 6,750 barrier and make an effort towards the 6,700 area the London index pulled back and traded above the 6,800 points. I believe it would be helpful that I explained why the FTSE is performing like that as it will offer you an insider’s perspective on the index’s outlook.

In my previous letter to you I discussed that the FTSE was bound for more losses on the back of Governor Carney’s comments that a rate hike from the Bank of England could come “sooner than the markets are expecting”. However, the release of the Bank of England’s minutes didn’t reveal a general consensus among the committee to move forward soon.

At the same time, Fed’s Yellen expressed her commitment to keep the monetary policy stable for the time being on her press conference after the FOMC meeting. Her comments drove the US stock markets to new highs and also lifted the FTSE higher so the combined effect of a steady rate policy from both the BoE and the Fed worked in favor of the bulls.

But here’s the twist: two new BoE members expressed their support to the earlier rate hike idea last Thursday, Martin Weale and Ian McCafferty both expressed the view that a hike sooner than the market expects would be a step towards the right direction. So where does this leave us?

As you can see the FTSE’s outlook is influenced by two opposing forces, on the one hand we have Fed’s intention to leave rates as they are and that definitely offers support to the major stock markets. On the other hand however, it looks like the idea of an earlier rate hike from the Bank of England is gaining traction and that could drive the London index significantly lower.

So my guidance for this week? Be careful, I am looking at the FTSE pointing lower and a re-test of the 6,750 points low seems possible but that’s not a certainty at this point. The events scheduled for release over the next days can turn the tables again so while I am inclined to short the index I would wait for a move below the 6,800 points again before I set my targets at the 6,750 area.

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