FTSE 100 Hits New Highs
The FTSE reached record highs on Friday, lifted by optimism around potential rate cuts and a weaker pound. Let’s break down the forces driving this breakout and assess whether the rally has the legs to go further.
Rate Cut Hopes Drive Momentum
The foundation of the FTSE’s recent rally lies in fresh hopes for interest rate cuts. Disappointing UK retail sales for December and signs of easing inflation have shifted expectations, with markets now pricing in two to three quarter-point cuts by the Bank of England this year. This shift in sentiment propelled the FTSE 100 up 3.2% over the week, with the FTSE 250—the more domestically focused index—adding an even more impressive 4.5%.
A weaker pound added fuel to the fire, dropping to $1.218 on Friday. This decline has provided a tailwind for the FTSE 100’s multinational-heavy line-up, as companies with significant overseas earnings stand to benefit from the currency’s slide.
Sector Winners and Losers
The breakdown by sector shows the energy sector leading the way, with a 14.09% gain over the past month, driven by firm crude prices. Materials weren’t far behind, rising 7.29%, while financials and healthcare posted robust gains of over 5%.
However, not all sectors shared the spoils. Consumer discretionary stocks fell 2.17%, as the aftershocks of a lacklustre festive shopping season continued to weigh on sentiment. This divergence highlights the importance of sectoral dynamics in shaping the index's performance.
The Technical Picture
Weekly Analysis
Zooming out to the weekly chart, the FTSE’s breakout aligns with a broader uptrend in place since the pandemic lows of 2020. Over the past year, the index entered a period of consolidation, forming a wedge or flag pattern. This type of pattern often acts as a continuation structure within an established trend. Last week’s decisive push higher broke through both the flag’s upper boundary and previous trend highs, suggesting that the move could have staying power within the context of the long-term uptrend.
FTSE 100 Weekly Candle Chart
Past performance is not a reliable indicator of future results
Daily Analysis
On the daily chart, we can analyse last week’s breakout in greater detail. The FTSE printed three consecutive large green candles last week, each closing near the session highs. This pattern signals strong bullish momentum, as buyers consistently controlled the market during each session. The RSI has moved into overbought territory at 72, which often signals the potential for short-term consolidation. However, the lack of negative divergence suggests that the current trend remains intact.
One concern is the absence of significant volume during the breakout. Typically, higher volume adds conviction to moves of this nature. Without it, traders should remain cautious and watch for signs of exhaustion. For the rally to maintain its integrity, price action needs to consolidate above the May 2024 highs, which now serve as a critical support level. A sustained move below this level could indicate that the breakout is losing steam and may reverse.
FTSE 100 Daily Candle Chart
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Rate Cut Hopes Drive Momentum
The foundation of the FTSE’s recent rally lies in fresh hopes for interest rate cuts. Disappointing UK retail sales for December and signs of easing inflation have shifted expectations, with markets now pricing in two to three quarter-point cuts by the Bank of England this year. This shift in sentiment propelled the FTSE 100 up 3.2% over the week, with the FTSE 250—the more domestically focused index—adding an even more impressive 4.5%.
A weaker pound added fuel to the fire, dropping to $1.218 on Friday. This decline has provided a tailwind for the FTSE 100’s multinational-heavy line-up, as companies with significant overseas earnings stand to benefit from the currency’s slide.
Sector Winners and Losers
The breakdown by sector shows the energy sector leading the way, with a 14.09% gain over the past month, driven by firm crude prices. Materials weren’t far behind, rising 7.29%, while financials and healthcare posted robust gains of over 5%.
However, not all sectors shared the spoils. Consumer discretionary stocks fell 2.17%, as the aftershocks of a lacklustre festive shopping season continued to weigh on sentiment. This divergence highlights the importance of sectoral dynamics in shaping the index's performance.
The Technical Picture
Weekly Analysis
Zooming out to the weekly chart, the FTSE’s breakout aligns with a broader uptrend in place since the pandemic lows of 2020. Over the past year, the index entered a period of consolidation, forming a wedge or flag pattern. This type of pattern often acts as a continuation structure within an established trend. Last week’s decisive push higher broke through both the flag’s upper boundary and previous trend highs, suggesting that the move could have staying power within the context of the long-term uptrend.
FTSE 100 Weekly Candle Chart
Past performance is not a reliable indicator of future results
Daily Analysis
On the daily chart, we can analyse last week’s breakout in greater detail. The FTSE printed three consecutive large green candles last week, each closing near the session highs. This pattern signals strong bullish momentum, as buyers consistently controlled the market during each session. The RSI has moved into overbought territory at 72, which often signals the potential for short-term consolidation. However, the lack of negative divergence suggests that the current trend remains intact.
One concern is the absence of significant volume during the breakout. Typically, higher volume adds conviction to moves of this nature. Without it, traders should remain cautious and watch for signs of exhaustion. For the rally to maintain its integrity, price action needs to consolidate above the May 2024 highs, which now serve as a critical support level. A sustained move below this level could indicate that the breakout is losing steam and may reverse.
FTSE 100 Daily Candle Chart
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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