The above chart clearly displays the recent bullish performance of Britain’s all-share index, the FTSE 100. The performance of the index heading into 2017 has been nothing short of phenomenal, with upward momentum clearly driving the FTSE to its current level around 7176.63. That the UK premiere index is performing so strongly may come as a surprise to many investors and day traders. Financial bookmakers are going long on the index, with projections above the current level. Just last week, the premier UK index closed at its highest level. Traders may be wondering why the FTSE 100 is performing so strongly, given the ever-present Brexit fears. Fortunately, the explanation of the FTSE’s recent performance is rather simple: mining stocks have been trading much higher. The mining sector endured an incredible rally across the board, and this helped to lift the FTSE 100 to its current levels. But there is also another reason why the FTSE is rushing out of the gates at breakneck speed: the GBP.
What’s going on with the GBP and why is it affecting the FTSE 100 index?
The Brexit referendum placed the tremendous pressure on the sterling. Around June 2016, the GBP was trading at 1.47/1.48 to the USD. Soon thereafter, the GBP/USD pair hit a 31-year low and was hovering around 1.21/1.22. A weaker GBP has important implications for the UK economy, not least of which is its effect on companies based outside of the UK. For every EUR, in USD or JPY earned aboard, the repatriated earnings in GBP are worth significantly more. Since the FTSE 100 index is primarily comprised of foreign-based companies, the earnings are not in GBP, but in foreign currencies. When these earnings are brought back to the UK, it appears as if inflated profits are being generated. The currency effect is an important one to bear in mind when evaluating the performance of a blue-chip index like the FTSE 100. Approximately 75% of the FTSE is made up of foreign companies. The FTSE 250 index is British-based and that’s precisely why it’s performance has soured since the Brexit and the sharp devaluation in the GBP.
