Currency movements could help explain the underperformance of the FTSE 100
Thursday 19 Apr 2018 Author: Tom Sieber

The pound is back on the front foot, reaching its highest levels versus the dollar since the Brexit vote as we went to press.

The resurgence of sterling reflects the first increase in UK interest rates in more than a decade in November 2017, expectations for a further hike when the Bank of England (BoE) next meets on 10 May, and the impact on the dollar of tensions over trade between the US and several countries, most notably China.

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As the chart shows, the renaissance of sterling has implications for the performance of the FTSE 100, undermining the relative value of its constituents’ large amount of overseas earnings.

Although there has been a wider hit to global markets this year thanks to issues in the technology sector and the war of words over trade, the strong pound may explain why the FTSE 100 has underperformed other global indices of late.

The scope for the BoE to increase rates is enhanced by a release from the Office for National Statistics showing that when wages are compared with its new CPIH measure of inflation (which includes housing costs), average weekly earnings rose 0.2% year-on-year in the three months to February.

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