Why does FTSE tend to rise when GBP falls, and vice versa?

Updated: Nov 19, 2020

The main reason is the return to inverse correlation.

In simple terms.

A lot of FTSE companies are UK based multinationals with a significant part of their profits in currencies other than sterling. When the pound falls those international operations gain value and conversely when the pound strengthens, they lose value.

The main reason is that most UK firms are selling overseas. For example, Unilever is the biggest company in the UK, by market cap.

I would imagine about only 10% of its revenues comes from the UK.

So, the FTSE is not dependent on the UK economy, UK sales or the UK Pound.

Those foreign sales become bigger in GBP, as soon as the Pound Sterling falls.

This is because such a large proportion of profits for FTSE 100 companies is made in dollars. If sterling weakens then dollar revenues, once converted back into sterling, are worth more.

Therefore, even with the uncertainty of company performance during the COVID pandemic one of the strongest drivers in the fortunes of the FTSE is the value of the Sterling, compared to other majors, especially the USD. The Brexit standoff with Europe and future trading partners will continue to cause this volatility.

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