Despite having a fairly siggy week, the FTSE 100 is less than 5% away from touching the psychologically important level of 9,000.
After bouncing around on either side of 8,000 for what seemed like years, the index of the UK’s top companies broke higher in the early weeks of 2025 and now has 9,000 within its sights.
Whether the index can breach this level in the near term depends on several factors, none more important than where sterling goes in the coming weeks.
The inverse relationship between the pound and the FTSE 100 has been the main driving force behind London’s leading index so far in 2025. A weaker pound’s favourable currency fluctuation supports companies’ earnings that are reported in dollars or euros. These companies make up a significant proportion of the FTSE 100 index and have the power to drive returns on an index level. And that they did.
The FTSE 100 hit a series of all-time highs through January and February 2025 as heavyweight overseas earners enjoyed the pounds sharp decline against the dollar.
In early 2025, poor UK economic data and concerns about the outlook were behind the pound’s weakness against the dollar, which was extenuated by relative strength in the US economy and forecasts of just one or two rate cuts by the Federal Reserve this year.
Indeed, until markets learned that UK CPI inflation rose to 3% in January, there was also a perceived divergence in the monetary policy paths of the Bank of England and the Federal Reserve. Interest rate futures markets had been pricing three or four cuts by the Bank of England compared to just one in the United States.
This set the pound on a path to the downside against the dollar and provided welcome support to the FTSE 100. This trend is now in jeopardy.
The BoE now looks unlikely to cut at its next meeting, and investors will have a close eye on any signs of inflation from wages or purchasing prices. Should inflation show signs of increasing, concerns about the BoE’s ability to reduce borrowing costs will intensify. This will be played out in the pound.
There are technical factors to consider around the FTSE 100 which underscores the importance of what the pound does next.
Such an unusually consistent rally for the FTSE 100 in early 2025 has left many companies trading at elevated levels and vulnerable to mediocre earnings. Barclays, Mondi, Marks & Spencer, and NatWest are obvious examples of investors banking profits after results didn’t knock it out of the park.
Failing a bumper surge in earnings on a constant currency basis, whether London’s leading index can test 9,000 before a meaningful correction relies heavily on the gyrations of the pound and how it can support earnings on an actual currency basis.