FTSE bounce continues as traders eye BoE and ECB rate decisions

The FTSE 100 climbed another 1.6% on Thursday as resource stocks saw more demand as metal and crude oil prices continued to rally but trader eyes remain fixed on interest rate decisions from the Bank of England (BOE) and the European Central Bank (ECB) due out as 12pm (UK time) and 12.45pm (UK time) respectively today.

Clearly the announcements made over the last 48 hours by Angela Merkel and other European officials to make a pledge of liquidity support to banks in trouble is welcomed by investors and has helped to ease some of the more immediate concerns of a banking crisis. However, the truth of the matter is that sentiment has not changed overnight and whilst the gains seen recently are encouraging, they remain liable to early profit taking until investors can feel fully reassured that there are credible and unified measures on the table to combat debt contagion.

Resource shares have continued to drive the FTSE 100 higher, with investors taking encouragement from the bounce in metal prices and crude oil. This bounce has helped to entice investors to pick up mining and oil stocks from their recent lows and given that resource stocks have a heavyweight bearing on the FTSE 100, we can locate much of the rally’s energy here.

Banks have also seen gains today, with Lloyds Banking Group, Barclay’s and Standard Chartered Bank all rallying 4% to trade near the top of the FTSE 100 leader board.

Eyes on BoE and ECB rate decisions
All eyes however remain transfixed on interest rate decisions from the BoE and ECB.

Traders are not expecting any movement from the Bank of England in terms of interest rates or QE levels. The likelihood is that if the BoE is going to extend the amount of stimulus to help support the UK recovery, it is likely to happen next month when the UK Central Bank has had time to digest the quarterly inflation report.

However, we could see movement at the ECB which will be the last under the stewardship of Jean-Claude Trichet (JCT). Whilst there is a majority expectation that rates will remain on hold, there is a small chance that we could see a cut in interest rates, a policy change that was hinted towards in the last ECB press conference with JCT. Moreover, the ECB could also announce an extension to liquidity measures, which many may see as a pre-empt to a cut in rates next month.

There remains some doubt as to exactly what to expect from JCT today and so this is likely to keep traders on the edge of their seats somewhat, particularly for the press conference after the decision is announced where close examination of the tone of voice used will hopefully give further clues as to monetary policy direction over the ensuing months.