Pound Sterling fell significantly at the beginning of October, in the wake of Theresa May’s infamous speech at the Conservative Party Conference. Uncertainty regarding the Prime Minister’s future began to take hold after Mrs May’s speech was littered with misfortune. May had coughing fits throughout this important event, and she was presented with her ‘P45’ by a prankster in the audience. Even the lettering on the stage backdrop seemed to mirror the circumstances – in an ironic twist, two letters fell during the speech, reducing the Tories’ conference statement to ‘Building a Country that Works or Everyon’.
The resulting fall in the value of Sterling was just another chapter in the story of an economy that has been unstable since the ‘Leave’ result of the Brexit referendum in June last year. Following the referendum, the immediate aftermath saw the pound fall to its lowest value in over 30 years, with the FTSE following suit. By September, the FTSE had recovered strongly. However, the pound continued to fall. In contrast, the week after Mrs May’s recent turbulent speech saw a strong recovery in Sterling’s value, whilst the FTSE 100 slid 14.98 points.
An Unusual Relationship
Given the fact that both the value of the FTSE and Pound Sterling are used as indicators of the welfare of the UK’s economy, one might expect that a rise in the value of one would have a similar – and proportional – affect on the other. However, as the above examples show, this pattern doesn’t always follow. In fact, there often seems to be an inverse correlation. So why is the relationship between the FTSE and Sterling so unusual?
Whilst many factors are at play here, the crux of the matter lies in the value of UK exports. It is estimated that over 70% of revenue generated by FTSE 100 companies comes from foreign markets. Because of this, any changes to currency exchange rates can significantly affect market prices; when the Pound rises, the value of British companies’ overseas earnings falls as they are converted back into Sterling. The FTSE’s reliance on exports fuels the unusual – and often unpredictable – relationship between the two.
What Does this Means for Investors?
Brexit negotiations and the uncertainty surrounding the UK’s political leadership mean that there is much potential for market volatility in the coming months. This makes investment in domestic markets less attractive; indeed, many investors were caught out by the unexpected rise in the FTSE in the weeks following the European referendum. Because of this enduring volatility and unpredictability, it is particularly difficult for investors to make good market predictions.
At a time when confidence in Britain on the world market is relatively weak, this presents a good opportunity for people to trade on the Forex market. Trading Forex gives investors access to the largest and most liquid financial market in the world. Trading accounts such as those offered by Oanda give people the tools and information they need to make well-informed trades.
Have you been caught out by an unexpected change in the British financial market? Have you considered trading Forex?
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.