Brexit bites again as the pound comes crashing down to hit a 31-year low against the US dollar. This comes in the same week that the FTSE 250 hits record highs and the FTSE 100 comes close to all-time highs. Added to this, the International Monetary Fund has said that the UK will be the world’s fastest growing major economy in 2016.
These headlines seem somewhat conflicting, and it can be hard to know what to do with your savings when markets are volatile and interest rates on cash accounts are low. Topping up your investments little and often is a way to average the cost at which you enter the market and therefore help to manage volatility. This is known as pound-cost averaging.
Explaining the market
The uncertainty surrounding Brexit is what has triggered these currency movements. On the 23 June, the day we went to the polls, sterling was 1.48 against the dollar, yesterday it hit 1.27.
The one thing markets hate more than anything else is uncertainty. With the European single market under threat that creates a new and unknown environment for trade. Any rhetoric surrounding Brexit and the potential shape that could take triggers currency movements.
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A boost to UK equity
These currency movements are the cause of the boost in the FTSE 100. Collectively, these companies have a lot of their earnings overseas. $1 in earnings today is worth £0.78 whereas it would have been worth £0.68 on 23 June. That means that their profits are worth more and this has a positive impact on their valuation.
The FTSE 250 has a higher proportion of UK-facing businesses than the FTSE 100. This is why it has lagged behind the FTSE 100 since the referendum. But this index has benefited from better than expected economic data, on Tuesday a survey suggested the UK construction industry had grown.
A low pound could boost growth
It is important to remember that currency is flexible and movements aren’t necessarily a bad thing. A lower pound is likely to increase foreign investment and help bolster the economy. A drop in the currency make UK assets more attractive.