August 14, 2013 in UK
Sterling has been remarkably strong in recent weeks rising from 1.48 USD to the current level of 1.55 USD. Economic data has been better than expected with PMI (Purchasing Manager’s index) figures the best for 6 years, GDP second quarter figures double the 0.3% expected growth surprising the market with 0.6% and subsequently increased growth forecasts for 2014. The UK economy is performing much better than expected as recent economic data shows and this has led to a stronger pound especially against the US dollar. However, there are inflation concerns and unemployment is still very high. Carney’s comments on forward guidance stating that interest rates will remain at 0.5% for the next 3 years has also acted as a catalyst in supporting Sterling. However, figures out today show that unemployment is still at 7.8% which is much better than much of Europe but is still on the historic high side.
With Sterling above $1.55 and a number of UK blue chip companies major dollar earners, strength in the pound is going to have a detrimental impact on profits for a number of major dollar earner companies such as BAE Systems, Barclays, BP, Glaxo, HSBC, Rio Tinto and Vodafone. In recent weeks both Barclays and BP have underperformed the FTSE 100 and are barely changed from the level at the start of the year.
If Sterling continues to strengthen this is going to make it difficult for the FTSE 100 to make much further headway as a number of the UK’s largest companies (especially heavyweight mining and oil companies) derive a majority of their profits in US dollars.