London's FTSE 100 rose 0.7% on Wednesday, bucking a global trend of risk-off sentiment, after a hotter-than-expected US inflation reading sent the dollar higher and knocked the pound lower. The currency move gave a boost to the index's many multinational members, which earn in dollars and other foreign currencies but report profits in sterling.
Among the biggest gainers were pharmaceutical giants AstraZeneca and GSK, along with luxury retailer Burberry. These companies generate a large share of their revenue overseas, so a weaker pound effectively inflates the value of those earnings when converted back into sterling. Even though nothing changed in terms of actual sales volumes, the accounting boost can lift profit expectations and, in turn, share prices.
Why a weaker pound helps the FTSE 100
The FTSE 100 is often described as a "global index" because its constituents are mostly large, internationally focused businesses. When sterling falls, their foreign earnings translate into more pounds, which can make their reported profits look better. This dynamic is a well-known feature of the UK market and often means the FTSE 100 moves inversely to the pound.
On Wednesday, the US inflation report showed prices rising faster than economists had predicted, with gasoline prices a notable contributor. That prompted investors to bet that the Federal Reserve would keep interest rates higher for longer, which tends to strengthen the dollar. As the dollar climbed, sterling dropped, and the FTSE 100's export-heavy composition turned the currency move into a tailwind.
The reaction was not limited to London. The same inflation data also pushed European bond yields higher and hit other markets, as investors reassessed the path of global interest rates. For a deeper look at how the inflation surprise affected bond markets, see our piece on European bond yields rising.
What this means for investors
For everyday investors, the FTSE 100's rise on a day of hot US inflation is a reminder that currency movements can be just as important as company fundamentals. If you hold a UK-focused fund or individual FTSE 100 stocks, a weaker pound can boost returns even when the underlying business hasn't changed. Conversely, a stronger pound can weigh on the index, even if companies are performing well.
It's also worth noting that not all UK stocks benefit from a weaker pound. Companies that earn most of their revenue domestically, such as retailers and utilities, may see little benefit or even face higher input costs. The FTSE 250, which has a larger domestic weighting, often reacts differently to currency moves.
The inflation data also has broader implications. If the Federal Reserve is forced to keep rates higher, that could slow the US economy and dampen global growth. That might eventually hurt demand for the very goods and services that FTSE 100 companies sell. So while the immediate reaction was positive, the longer-term picture is more mixed.
Investors are now watching to see whether the Fed will hike rates again in December. According to one analysis, Citi now expects a December hike following the hot inflation print. That would likely keep the dollar firm and could continue to support the FTSE 100 in the short term, but it also raises the risk of a sharper economic slowdown.
Global ripple effects
The inflation surprise didn't just move the pound. It also hit emerging markets, with currencies like the South African rand sliding to multi-month lows. In Latin America, stock markets fell as investors worried about higher US rates. For a broader view of how the data affected other regions, you can read about Latin American markets sliding and the rand's drop to 16.62 per dollar.
Closer to home, the FTSE 100's resilience stands in contrast to other markets that took the inflation news harder. But investors should be cautious about reading too much into a single day's move. Currency-driven gains can reverse quickly if the dollar weakens or if the global growth outlook deteriorates.
For those with a diversified portfolio, the key takeaway is that currency risk is a real factor in international investing. A fund that tracks the FTSE 100 is not a pure bet on the UK economy; it's a bet on global growth and the pound's value. Understanding that can help you make more informed decisions about your exposure.
As always, it's important to focus on your own financial goals and time horizon rather than reacting to daily market noise. The FTSE 100's rise on Wednesday is a useful illustration of how interconnected global markets are, but it doesn't change the fundamentals of your long-term plan.
