One's up, the other is down
Yesterday the FTSE fell by around 0.9% while sterling climbed to a 10 week-high. This article is written to explain the seemingly odd relationship between the FTSE 100 and the GBP. In the chart below the candlestick chart is the FTSE 100 and the GBPUSD chart is the red line.
There is a strong, albeit not perfect, correlation that when the GBP falls the FTSE 100 rises. Why is that?
Foreign earnings explain the GBP's relationship with the FTSE
The answer is primarily due to the foreign earnings that many FTSE 100 companies have. FTSE 100 companies earn a considerable portion of their revenues in USD. So, when the GBPUSD rate falls , the companies profits are increased.
Consider the following example:
- A firm, like BP, owns a US operation
- It generates $1m in profits
- At GBP/USD of 1.25 the profits are worth £800K
- At GBP/USD 1.00 they are worth £1m
So, the reason for the relationship is clear, as sterling weakens the USD profits become more profitable for the company. The chart below shows the regions , in the outer ring, that FTSE 100 companies generate their revenues from.
So, in the UK, a falling currency supports the FTSE 100 stock market due to the amount of foreign revenue.
Yesterday's GBPUSD set-up marches onwards, though the GBPUSD was just short of my ideal 1.3000 entry
