Why is the London stock market rising if the pound is crashing down?


Worries over Brexit negotiations have sent the pound tumbling to fresh 31-year lows, but the London market has powered ahead as sterling's woes have buoyed stocks.

The FTSE 100 Index is now within a whisker of its all-time record high, while the FTSE 250 Index - which had been hit hard in the immediate aftermath of the vote to quit the EU - has already surpassed its highest-ever level.

Why is the stock market benefiting while the pound suffers?

The pound has slumped to new three-decade lows after Theresa May's pledge to kick start the process of leaving the EU by the end of next March raised fears of a "hard" Brexit.

There are concerns that Britain will lose access to the European single market as part of plans to clamp down on immigration.

But the falling pound has been good news for the London stock market, because it means higher sales and earnings for London-listed firms with an overseas focus when they are translated back into sterling.

Why is the performance of the London market linked so closely to the value of the pound?

City of London
(Dominic Lipinski/PA)

The market gains are being driven by foreign firms listed in London and a rally among UK companies which make a large amount of their sales in US dollars.

The FTSE 100 in particular has benefited, as around three quarters of earnings from FTSE 100 companies come from outside the UK.

As well as overseas firms with a London listing, UK industrial companies have also fared well, with the likes of engine maker Rolls-Royce and defence giant BAE Systems joining in the latest rally.

Will the pound keep falling?

Currency experts fear sterling could end up trading between 1.20 and 1.25 against the US dollar by the end of the year.

The all-time low against the greenback from March 1985 was 1.05 dollars, although it is thought the pound will avoid hitting this level.

So will the FTSE keep rising?

Bank of England
(Anthony Devlin/PA)

Brexit fears may hit stocks at some stage as the negotiations play out, depending on the outcome for the UK, but many believe there are more market gains to come.

The strength of the FTSE 100 is also seen as reflecting the resilience of the UK economy, which has held up well as the shock of the Brexit vote has passed and following swift action by the Bank of England.