FTSE 100 on a Positive Note, but It Could Go Either Way!


What has the FTSE 100, a British index comprising the most prestigious 100 stocks listed on the London Stock Exchange, got to do with monetary policy meetings on the other side of the Atlantic in the United States?

On the face of it, not really that much. However, in circumstances that are similar with regard to the overall monetary policy of central banks on both sides of the Atlantic, perhaps it could be considered that investors are focused on the result of the first announcement of the year, especially when considering the amount of speculation over potential rate cuts.

Indicative pricing only

This morning, the FTSE 100 index begins the trading day at a strong point. The London-based index reached 7657.3 points in the middle of the day on Friday, February 2, last week's trading according to the FXOpen chart, which is the result of a steady rise in value from a lower point of 7,447.6 on January 18.

The relatively strong position of the FTSE 100 is still a far cry from the 8,000-point barrier, which it passed for the very first time since its establishment in February last year, but it is of interest considering that there is now an unexpected yet important factor to consider with regard to the aforementioned US monetary policy meeting.

Last week, the Federal Open Market Committee (FOMC) announced that it would not be reducing interest rates in the medium term, which was contrary to the predictions of many analysts and market participants who had anticipated that the FOMC would announce that it would reduce interest rates in March, and then again later on in the spring before the summer of 2024 begins.

The uptrend in the FTSE 100 index took place before this announcement, and with a bullish sentiment across Western markets, confidence was high in FTSE 100 contingents because the United Kingdom has had a similarly conservative approach to that of the United States. Therefore, the rate cuts in the United States may have signalled the path toward rate cuts in the United Kingdom and European Union. However, those rate cuts did not come, so now it is a case of speculation as to whether the Bank of England will follow the US policy of keeping rates the same or if the Bank of England may disregard the Fed's ultra-cautious methodology and begin to reduce rates.

The FTSE 100 contingents are large blue-chip corporations. These are mostly long-established brick-and-mortar entities that are not subject to the same blustery conditions as more dynamic tech firms listed on US exchanges with their head offices in Silicon Valley.

London's finest are the grey-suit establishments, and therefore, such economies of scale mean large monthly commitments over long periods of time.

There is now a crossroads. Either the Bank of England follows the US and does not cut rates, therefore saddling the large corporations with equally high monthly commitment repayments as today, or it breaks from taking the same route as the Federal Reserve and reduces rates, which would free up capital for large companies to either save, reinvest or grow further.

This makes for a very interesting position for the FTSE 100 index, as it has been building up in value with investor confidence based on companies included in this index having more spare capital in case of a rate cut; however, if the rate cut does not happen, will it stagnate?

This is, therefore, a very interesting index, as it could go either way.

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