The latest rate decision by the Bank of England was that interest rates would remain the same. This was what some analysts anticipated as the bank has been reticent to make any changes to rates while they assess the impact of Brexit. However, many believe that a rate increase will be needed at some time in the fairly near future.
The Announcement Saw the Pound Drop
The market response to the announcement saw the pound fall against other major world currencies, dropping 0.6% against the American dollar and 0.78% against the euro on the day. This put it at 1.3146 dollars and 1.1068 euros at its lowest point on August 2nd. The pound has never recovered to pre-Brexit values; however, these are significant drops that suggest the currency markets were hoping for a rate rise – when the Fed raise rates in America we typically have seen the dollar rally up in recent times.
FTSE 100 Surges Up
However, while the rate change (or lack thereof) announcement caused the pound to fall, the FTSE 100 rose. It kept gaining value throughout the day after the announcement and ended up 63 points above its opening point at 7,7475. Big winners in terms of the companies on the index included the retail giant Next, who had their shares rise by 9.2% – though Next also announced increased shareholder dividends that day and so this jump was potentially one that would have happened regardless of changes in the pound.
The Inverse Pound and FTSE 100 Relationship
For those who are interested in the markets or who trade on sites like London Capital Group, this will not be an unusual sight, however it can seem quite unintuitive that the main London Stock Exchange share index went up while the UK’s currency floundered. Actually, this is something that almost always happens. When the pound takes a dive due to a major event or announcement, the FTSE share indices tend to see peaks. This happened with all of the major pound-affecting events in recent times, including Brexit and the UK election, and usually, the opposite is true too – if the pound makes gains against the dollar and euro, the share indices reflect a drop.
Why Is This the Case?
The reason why this happens is simply that many of the biggest companies on the London Stock Exchange earn other currencies. The LSE has an extremely global collection of companies, and so, as you might expect, there are a lot of dollar earning businesses among its top shares. This means that when the pound is weak in terms of exchange rates, these companies are actually a better investment. It may sound counterintuitive that a weak pound would make for better investments, but it is undeniably the case.
When you anticipate a drop in value for the pound because of an economic calendar or political event, it can often be a good idea to look at share prices and consider which may well rise in that eventuality. In most cases, these events where the pound is weakened do cause a jump in the FTSE 100 and FTSE 250 that investors who are concerned with spread betting or stocks can take advantage of.