Britain's FTSE 100 stock market index, unlike its equivalents from other countries, has yet to update annual lows as part of the current continuing declines. However, it isn’t due to the British shares, but to a strong fall of the national currency.
The pound has updated its historic low against the dollar after the new government announced the biggest tax cut in 50 years. Tax cut was an attempt to handle the economic crisis. However, taking into account 10% inflation, neither traders nor investors understand it. Even the International Monetary Fund, which rarely intervenes in the economic policies of developed countries, called on the British government to change its plans.
The Bank of England is in such conditions, where it has no choice but to rapidly change its position. The Bank of England intervened in the situation after the British officials’ statements about tax cuts crashed the markets of bonds, stocks and currencies one by one. In order to support financial markets, it was announced about buying back government bonds as many as possible.
An interesting situation arises. On the one hand, it’s necessary to handle the highest inflation in 40 years. On the other hand, emergency market support through the purchase of bonds doesn’t correlate with plans to curb price rises. The idea has a very little chance to succeed. It’s worth remembering, if you chase two hares, you won't catch any.
Such an intervention by the Bank of England may at least temporarily stop the fall of the stock market and the national currency. But once there are new triggers for the downside (it’s a matter of time, given the economic and political situation in the world), the FTSE 100 will head towards an annual low of 6755 again. For example, the new drop could start from the 6950 level, which has been a good support for the FTSE 100 this year.
The following trade strategies may be suggested:
Sell FTSE 100 as it climbs into the 6950 area. Take profit 1 – 6850. Take profit 2 – 6750. Stop loss – 7050.
Also, traders, at their discretion, can use the Trailing stop instead of the fixed Stop loss.