Pound strengthening ‘not a proxy’ for the FTSE 100

The pound edged past $1.40 on Friday, its highest level in nearly three years, in a show of continued optimism surrounding the UK economy.

As the close of Friday trading nears, Cable is sitting above the $1.40 mark, up over 0.3% on the day.

The pound has been steadily progressing upwards recently, reaching $1.39 at the beginning of the week, coinciding with a rise in the FTSE 100.

The pound is up to 1.16 against the Euro, a 1% rise from Thursday’s close. It is also up 3.56% against the Eurozone currency over the last three months.

This follows a heavy fall in the value of the pound in the lead up to an anticipated ‘hard Brexit’ from the European Union.

Simon French, chief economist at Panmure Gordon, said: “Brexit has given international investors an excuse since 2016 to reduce their holdings in sterling. As the UK progresses through 2021 it is likely to see more stability in its relationship with the EU as adjustment frictions begin to dissipate. This should translate to a greater upside for the pound against the euro than than against the dollar in our view.

Cable’s recent surge comes following vaccine roll-outs surpassing expectations, in addition to an expected easing of lockdown measures by the Prime Minister next week.

Russ Mould, investment director at AJ Mould, said:

“The run for sterling towards the $1.40 mark against the dollar reflects, in part, optimism about what a rapid vaccine roll-out would mean for reopening in the UK, setting quite high expectations ahead of Boris Johnson’s statement on the easing of restrictions on Monday.”

While the pound strengthening is a sign of economic optimism in the UK, the news has done nothing to rally the FTSE 100 index.

“A strong pound isn’t helping the index – crimping the relative value of its dominant overseas earnings in the latest reminder that the multi-national index is in no way a proxy for the UK economy,” said Mould.