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UK stocks slide as sterling powers higher

UK stocks were in a broad pullback on Wednesday, with sterling continuing its recent ascent that may put pressure on multi-nationals’ earnings.

The large-cap FTSE 100 index slid 0.6 per cent in early action to 7,355. Its mid-cap counterpart, the FTSE 250, that is thought to be somewhat less sensitive to currency fluctuations was down 0.35 per cent at 19,597.

Sterling added to Tuesday’s gains, rising 0.32 per cent on the dollar and 0.13 per cent on the euro. On a trade weighted basis, the pound hit a six-week high on the day, according to Reuters data.

A strong currency affects UK groups in two ways. The first is that it reduces the value of sales generated abroad when converted from foreign currency into pounds. At the same time, it may also reduce demand for UK goods by making them more expensive to foreign buyers.

There are several events coming up that may produce foreign currency fluctuations. Data are due on Wednesday on the UK labour market. A day later, the Bank of England will make a much anticipated policy decision.

“The risks of a ‘hawkish hold’ [in rates] this week – and a third rate hike dissenter joining the ranks – have increased,” said Chris Turner, currencies strategist at ING, adding that “any hawkish re-pricing in the UK rate curve is only likely to offer the pound a one-time boost.”

In another sign of the bearishness over UK stocks, “UK equity allocation remains depressed,” according to a survey by Bank of America Merill Lynch of fund managers.