UK banks look set for bullish breakout ahead of reopening step
UK banks look set for a bullish breakout, with the long-term picture looking positive as the country prepares to begin the reopening process
Reopening plans help lift banks as UK economic outlook improves
UK banks have been a serial underperformer against their US peers over the years, with the pandemic providing yet another reason for pessimism amongst the investor base. However, the notable 0.8% upgrade to 2021 UK growth forecasts from the IMF highlight the potential benefits from the recent vaccination efforts compared with their eurozone counterparts. This year has seen the sector dominated by fears over a sharp rise in unemployment and administrations. However, with Rishi Sunak’s actions effectively staving off much of the negative implications of the lockdown, those fears around huge loan writedowns for UK banks look to be overblown. Meanwhile, the expectations of an economic collapse as the UK leaves the European Union have also failed to materialize. Thus, the reopening taking place over the coming week will provide a timely reminder that things aren’t so bad for banks in the UK. Expectations of a surge in inflation as the economic recovery takes shape also bring the possibility of higher interest rates, thus boosting margins in the sector. With that in mind, banks provide one area of potential strength that could benefit from the reopening phase and embrace the monetary tightening that will ultimately go alongside it.
The FTSE 350 Banks sector provides one way to trade the sector, with the market looking to be on the cusp of a bullish breakout. Coming off the back of a one-month's consolidation phase, the 2946-2969 resistance zone is going to be key in the days ahead. With that in mind, we could see the index drive higher in a bullish continuation of the multi-month uptrend.
From a wider perspective, the monthly chart highlights the long-term descending channel seen in the decade leading to the pandemic. It is noticeable that the sector suffered in the years leading up to the Brexit deadline. However, with the uncertainty around Brexit finally dissipating, there is a chance we could see this market target a move back towards the upper threshold of that decade-long channel.
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