Pound falls but FTSE rises amid political turmoil

Pound falls but FTSE rises amid political turmoil

The currency market reacted sharply to the resignation of Boris Johnson as Foreign Secretary on 9 July, reversing earlier gains to be lower against the dollar and the euro.

The earlier resignation of David Davis as Brexit secretary had caused sterling to rise to a three week high against the dollar, before all of those gains reversed and the pound finished one tenth of a cent lower against the dollar last night.

While Mr Davis' resignation was seen as making a “soft” Brexit more likely without threatening the government, Mr Johnson’s departure was seen as placing the Prime Minister’s future in jeopardy, and increasing the likelihood of a harder form of Brexit.

Mr Davis was replaced by Dominic Raab, who supported leaving the EU during the referendum campaign in June 2016, while Mr Johnson has been replaced by Jeremy Hunt, who advocated remaining in the EU in the same vote.

The decline in the value of sterling caused the FTSE 100 to rise by one per cent.

This is because about 70 per cent of the earnings of FTSE 100 companies are achieved in other currencies, so weakness in the value of sterling boosts the value of those overseas earnings, making the shares more attractive.

Both the FTSE 100 and the FTSE 250, which are less sensitive to movement in the value of sterling, have risen this morning (10 July) by 0.08 per cent and 0.04 per cent respectively.

Helal Miah, investment research analyst at The Share Centre, said: “The events of the last 24 hours have greatly increased the fears for businesses and investors which justifies sterling’s fall. The stock market rose.

"This gain is more likely a reaction to sterling’s fall than investors taking a view that today’s events are positive for shares following the same trend we have seen since the initial referendum, as a weaker sterling makes UK assets cheaper for international investor.”   

Mr Miah urged investors “not to panic”.

Speaking on the Radio 4 Today programme, Jane Sydenham, investment director at Rathbone Investment Management, said sterling didn’t fall by as much as many might have expected because investors are finding the current political environment difficult to analyse.