A Sterling Performance?

“Its not enough to succeed, others must fail…” Gore Vidal

Key Points:

·  Foreign exchange markets are a zero-sum game. For a currency to be strong, others must be weak. So when you hear the phrase 'sterling weakness', it could easily reflect US Dollar (USD) strength as much as a weak pound.

·  In the third quarter of 2023, sterling has fallen -3.3% against the USD, but it has hardly moved against the Euro or Japanese Yen. The dollar is surging because the US has a resilient economy, as well as a hawkish Federal Reserve.

·  But FX markets are skittish and prone to momentum. Do you remember when the Pound fell to U$1.07 in September 2022, and many commentators were predicting it would hit parity. Well, that didn't happen.

·  So what does the recent strength of USD mean for equity markets?

·  For one, a strong USD is helpful when translating dollar assets held by UK investors (say, in US equity funds) back into sterling terms. 

·  But there's also an important impact to the UK stock market. A large section of the FTSE100 (Oil, Pharma, Banking companies) report their earnings in USD. For a firm like BP, a stronger USD makes their overall valuation more attractive to investors.  Hence why a combination of rising oil prices and a stronger USD made BP the best performing FTSE100 stock in September 2023.