Lloyds shares: is it time to book gains?

The Lloyds share price has enjoyed a sharp rally from January’s lows around 53p to trade above the key 60p level, where it has since remained trading in a tight range.

The catalyst for the rally in January was a shift in expectations around interest rates amid concerns about stagflation in the UK and positive news around motor insurance litigation and potential redress that could cost Lloyds billions.

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Chancellor Rachel Reeves intervened in the motor financing litigation process to prevent any “considerable economic harm” through higher motor financing costs in the future and impact on banking capitalisation. This was a major win for Lloyds and its investors, who now await further developments with a semblance of optimism.

The other major factor at play for Lloyds’s share price is the expectations of the number of interest rate cuts in 2025.

Interest rate traders rolled back pricing on the number of interest rate cuts they saw in January 2025, with the Bank of England appearing to have their hand tied by stubbornly high inflation, and potential stagflation.

This is a double-edged sword for Lloyds.

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The prospect of interest rates staying higher for long is a major positive for Lloyds and other banks as it provides the opportunity for higher net interest margins and greater profitability.

However, in recent days, the number of interest rates predicted by interest rate markets has grown, suggesting the Bank of England will indeed have to act on interest rates to stem the UK economy’s decline caused by the Labour government’s economic policies.

There is an argument this hasn’t been properly priced into Lloyds shares yet.

That said, traders have a balancing act to contend with. While interest rates may fall later in the year, underlying demand for mortgages and other products remains robust. With underlying demand remaining strong, the volume of products sold will offset any impact on earnings from lower interest rates. This is reflected in the sideways nature of trade in Lloyds in recent days.

The positive macro factors seem to be priced into Lloyds, leaving the stock needing additional developments to break higher.

From a technical perspective, Lloyds formed a number of small gaps higher during the run higher, leaving the stock vulnerable to a pullback to close these gaps.

The first small gap was around the 54p level in mid-January, and the second more material gap occurred from 59p to 61p in late January. In the grand scheme of things, these gaps are relatively small. That said, technical traders will be eyeing the close of these gaps if the stock retreats.

In addition, Lloyds has become horribly rangebound, and the wider range of 63p – 53p will take some breaking. With shares near the top end of this range, the weight of historical price action favours a decline in Lloyds shares in the absence of any majorly positive macro developments.

Results due for release later in February could prove to be the next major catalyst.

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