Pound’s Drop Boosts FTSE 100 to All-Time High

The FTSE 100 reached a new record high on Monday, closing the trading session at 8,023 points. This marks the highest closing sum since February of last year when the index first surpassed the 8,000 barrier. The previous record stood at 8,012 points. This 1.6% jump was largely driven by strong performances from a variety of companies, particularly those in the financial and consumer sectors, such as retailers.

Recent weeks have seen the FTSE 100 gaining ground, with growing expectations for a cut in UK interest rates as inflation eases. Additionally, there is strong evidence that the UK economy has rebounded after the recession in the second half of last year. Analysts attribute this push for a new record high to two main factors: confidence that a major escalation in the Middle East conflict will be avoided and a weakening of the pound against the US dollar.

The pound is currently trading at five-month lows against the US dollar, at just $1.23, and was down half a cent on Monday. This is largely due to the strength of the dollar, as expectations in the US suggest that the Federal Reserve’s anticipated interest rate cuts may be further down the line than previously predicted. In general, higher interest rates tend to support a currency, particularly in the case of the US dollar, which is considered the world’s reserve currency. A weaker pound benefits companies in the FTSE 100 that generate revenue in the US, as their earnings are boosted when converted back to pounds.

The FTSE 100 has historically lagged behind its global counterparts since Brexit, and has faced challenges from a series of economic shocks. However, this year has seen the index reclaiming some ground due to perceived lower valuations in comparison to competing stocks overseas. Another contributing factor to its struggles has been the lack of technology companies, which have seen significant growth globally since the pandemic. Additionally, the 0.5% transaction tax on share purchases in UK firms has put the FTSE 100 at a disadvantage in trading hubs.

The index typically struggles during times of global economic uncertainty, as the majority of its constituents are companies whose performance is closely tied to demand for basic commodities, such as mining and industrial stocks. However, the signs of growth starting to emerge in the UK are not only positive for the FTSE 100, but also for pension funds. The more domestically-focused FTSE 250 has yet to surpass the 20,000 point mark, but saw gains of 1% on Monday.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented on the outlook for the FTSE 100: “With growth in the UK not exceeding expectations, and inflationary pressures beginning to ease, there is still optimism surrounding the possibility of interest rate cuts later in the summer. This appears to have contributed to the FTSE 100’s climb to a new record high.” She also noted that as lower borrowing costs are predicted for later this year, housebuilders have seen a sharp increase in their stock prices, as there is hope for a return in demand for new homes.

Certain companies listed on the FTSE 100, such as Rolls Royce and BAE Systems, have already surpassed record levels earlier this month and are on track to continue climbing. Aerospace stocks, in particular, have seen an increase due to ongoing conflicts and post-pandemic demand.