FTSE Flounders as Sterling Soars

The FTSE 100 index is currently trading at 7,118.54 (Thursday April 20, 2017) after a shocking drop on Thursday April 13, 2017 when it was trading at 7,327.60.

The recent performance of the FTSE 100 index has been lacklustre, given the strength of the GBP since PM May announced the snap election for June 8, 2017.

The performance of the FTSE is inversely correlated to the GBP. The reason for this is the composition of the FTSE 100 index: most companies on the index are based overseas. These overseas operations generate revenues in foreign currencies and then profits are repatriated back to the UK.

When the profits are repatriated back to the UK, a weak GBP would result in more money for UK companies. By contrast, a strong GBP erodes foreign earnings in GBP terms.

Sterling currency FTSE

Losses Commensurate with Gains in GBP

Fortunately for the FTSE 100 index, a recent string of poor performances was turned around on Thursday 20 April when the index edged higher. The recent trading levels were the worst since February. Major UK companies such as Unilever, Rio Tinto PLC, and Burberry Group PLC helped to drive up the all share index. But the big loser was Debenhams PLC which sank 5% following a decline in earnings. For the year to date, the FTSE 100 is trading in negative territory. This is the highest level for the GBP in over 6 months, after PM May called for a general election on June 8. The typical trend for the GBP and the FTSE 100 is an inverse relationship. When the GBP is up, the FTSE 100 is down. By Wednesday 19 April, the FTSE 100 index closed 0.5% lower.

The GBP/USD pair is currently trading at 1.2825, up 0.35% or $0.0044. The sterling is currently overinflated based on calls for a June 8 general election. The sheer value that was erased from the FTSE 100 was staggering – an estimated £46 billion. That value places the performance of the FTSE 100 index on par with the worst performance it recorded when the Brexit outcome was announced.

GBP USD Pair Approaching 4% Gains for the Year to Date

A top analyst from Lionexo has alluded to the positive performance of the GBP over the short-term. That the sterling has climbed to a 4-month high against the EUR at 1.1936 is significant. This marks the first time that the GBP has surpassed its 200-day MA against the EUR, another milestone. A big part of the reason why the GBP is performing so well is that Prime Minister May has taken concrete steps to diminish the prospects of a hard Brexit. A hard Brexit is one characterized by a sharp and sudden break from the EU, with no blueprint, and no consensus for an extrication process.

By calling for a snap election, the Prime Minister has effectively put political opposition parties on notice: the UK electorate will give the government a mandate vis-à-vis negotiating a Brexit. If the conservatives gain a majority of seats in the election, they will have a much stronger bargaining position to push through legislation. Such was the momentum driving the GBP after the announcement that it broke through the critical 1.29 resistance level against the USD. For the year to date, the GBP/USD pair is up 3.94% – a remarkable achievement given the uncertainty facing the UK economy.