FTSE 100 vs United Kingdom Interest RateThe UK Central Bank Just Cut Interest Rates: What Can We Expect?
Sometimes folks see this as a positive thing, but it all depends on the circumstances under which it is being done.
Monthly Chart Analysis: FTSE 100 Index vs. United Kingdom Interest Rate
If we look at the FTSE 100 Index, it's clear that the UK economy was in a strong uptrend between 1988 and 2001, which made many investors rich. The market topped around February 1999 and broke down in March 2001, signaling the end of the uptrend.
Since then, the UK’s economy has been moving sideways in what looks like a rising wedge. Sure, the price has been making new all-time highs, but the movement is very different from the uptrend between 1988 and 2001. During that uptrend, interest rate cuts were positive, and rising rates didn't do much other than cause minor pauses to the upward movement. In a strong uptrend like the one seen between 1988 and 2001, any investor could make money.
However, during the “sideways” movement within the rising wedge, interest rate cuts had a much different effect on the economy, often catastrophic. In the charts above, I have highlighted four points in time. These points represent two things:
The price was at the resistance area of the rising wedge.
Interest rates were cut.
Let’s review these points:
February 2001 - The price breaks down from the market top, signaling the uptrend was over and the market might move in the opposite direction. This point later becomes part of the resistance area of the rising wedge. The central bank at this time also cut rates, sending them below 5% for the first time. A market crash close to -45% occurred at this point.
November 2007 - The price reaches the previous level of February 2001, creating a resistance level, and interest rates pull back above 5%. The central bank proceeds to cut rates again. A market crash close to -45% once again occurs at this point.
February 2020 - After a historic interest rate plunge from over 5% to 0.5%, both the economy and interest rates stabilize over the next 10 years (2009-2018). In 2019, there is a spike in interest rates which brings us to February 2020. The price is near resistance levels, and the central bank decides to cut interest rates. A market crash close to -37% once again occurs at this point (Remember when they said the market crashed because of the Covid pandemic?).
August 2024 - Today, the price finds itself back at the resistance area of the rising wedge, and the central bank just announced it will start cutting interest rates. What do you think will happen next?
Every time the price found itself at the resistance area of this rising wedge of the FTSE 100 Index and interest rates were cut, the market plunged on average by -42%. Don’t let the “all-time high” prices fool you; history likes to repeat itself.
Current Price: 8,283.26
Forecast Price: 5,674.75 (-32.47%)
