If you have been following the markets’ reactions to events in the UK since the Brexit referendum last year, you may have noticed a phenomenon that may seem a bit odd. When a major event connected to the future of the UK and Brexit occurs, there is normally a noticeable reaction from both the pound, and the FTSE 100 – the index of 100 of the UK’s most influential stocks. However, there is often a strong inverse relationship between the two. As an example, when the June 8th election was announced, the pound actually soared (despite dropping before people knew what the Number 10 announcement was going to be about), but the FTSE 100 plummeted. In an opposite reaction, the FTSE 100 saw record highs when the bill to trigger Article 50 passed in parliament, but the pound dropped.
If both the stock market and the pound indicate faith in the UK economy, why do they react so differently?
The Effects of The Pound on Businesses
In actual fact, it is quite easy to explain why a strong pound correlates with a drop on the stock market and vice versa. Because many of the companies included in the big share indices like the FTSE 100, Ftse 250 and Dow Jones are businesses who trade internationally, a lot of their earnings are in US dollars (and other currencies). For a dollar earning company, a strong pound is a problem, because the dollars coming into the business are worth less. A weaker pound, however, means the money being earned in foreign currency buys more pounds. You don’t see this effect in every country, for instance there are major US companies who only really trade in the US, so the strength of the dollar does not impact their value as much, however in the UK the two are very strongly linked.
Different Traders Have Different Concerns
These effects really highlight how different traders have different concerns, and whether you are a Forex trader looking to sources like FXPro for advice, a stock trader concerned with businesses, or even a commodities trader, the same political or economic event can mean very different things for you.
There are always opportunities to be found when key macroeconomic events take place, and Brexit and now the UK general election are sure to deliver plenty of them, whatever you trade!