FTSE 100 hit a new high for the year

The FTSE 100 hit a new high in 2021 as the market rally continues. What to expect in 2022?

The stock market rally continues after the Christmas holidays, and most indices of developed economies are trading at their annual highs. This is the case with the FTSE 100 index, which has been closely watched in recent years both because of Brexit and because of the COVID-19 pandemic.

2020 brought about a decline in bearish territory as the pandemic gripped global economies. However, what followed was a gradual upward movement, and the FTSE 100 Index retraced the decline entirely.

From a technical standpoint, the price action is bullish. Before the pandemic, the market formed a contracting triangle that acted as a reversal pattern. The 7,750 area was strong enough and acted as strong resistance, but the market’s ability to move back there should be interpreted as a sign of strength for further upside.

What can break the bullish bias? Here are two aspects to consider: the tightening cycle initiated by the Bank of England in December 2021 and new inflationary pressures.

The Bank of England has embarked on a cautious hiking cycle

In December, the Monetary Policy Committee voted to increase the UK interest rate to 0.25% from 0.1% previously. While timid, this increase marks the start of a cautious hiking cycle, which could derail the FTSE 100 rally.

The key to moving forward is to assess how the Bank of England will act given the uncertainty posed by the Omicron variant and the threat of high inflation. At the previous meeting, the central bank suggested that further modest tightening was likely, but the message will likely change if we see a strong economic impact from the virus or even higher inflation.

Inflationary pressures are a risk

The current UK inflation rate is 5.1%, which is well above the target of 2%. If inflation is too high, it is difficult for businesses to set the right prices for their goods and services. Likewise, it is difficult for people to plan their expenses. As such, central banks are acting by raising the interest rate – exactly what the Bank of England has done. However, due to the pandemic, the risk is to tighten too quickly and have a negative impact on the economic recovery.

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