FTSE 100 Hits Record on Weak GBP, Bank Stock Rally

The FTSE 100, the UK’s benchmark stock index struck a record high on Tuesday, 21 January, 2025, adding to the strength seen over the past few trading sessions.

The index, composed of the largest 100 companies listed on the London Stock Exchange (LSEG), has benefitted from a decline in the British pound as well as a rally in highly-weighted sectors like banks and oil companies.

FTSE 100 Performance Chart

The FTSE 100 has broken out of an 8-month old consolidation to a fresh all-time high, with a rise through a declining trend line connecting the major highs since 15 May, 2024. The breakout to new highs can be taken as a sign buyers have taken control of the market and could lead the index price higher into new record territory. 

Alternatively, should the breakout not be sustained, the FTSE 100 could call back inside its former trading range.

A Weak GBP vs UK Stocks

The British pound has fallen below $1.22 so far in January versus the US dollar (GBP/USD), marking a steady decline from its value of $1.34 in late September. 

Many companies in the FTSE 100 index are not based in the UK, so a weaker pound can make their sterling-priced shares more affordable for foreign investors using other currencies, particularly US dollars. It also serves to increase the value of foreign earnings when converted back to pounds.

On 21 January the ONS (Office for National Statistics) released data showing that in December wages increased 5.6% in the UK, while unemployment rose to 4.4%. This triggered a fall in the British pound as traders assigned a higher chance to the Bank of England cutting interest rates at its next meeting. (Source: Bloomberg)

In addition to the potential benefits of a cheaper pound, fund managers could also be looking to the UK and Europe as a source of more favourable valuations versus the United States, which some argue is overvalued on a historical basis.

The UK Bank Stock Rally

UK banking stocks performed well in 2024, driven by historically high interest rates, which bolstered net interest margins. Banking stocks in the index include NatWest NWG, the top-performing UK stock of 2024, along with Barclays (BARC), HSBC (HSBA), and Standard Chartered (STAN).

While the prospect of lower UK interest rates this year could dampen appetite for bank stocks, the promise of looser financial regulations could offer support.

In addition to banking names, oil companies haven gotten off to a strong start in 2025, including BP (BP) and Shell (SHEL). As of 21 January, these stocks were up 6.72% and 7.61% respectively. (Source: Morningstar)

Conclusion: Can UK Stocks Keep Trending Higher?

UK stocks could continue trending higher, supported by a weaker pound, strong performances in banking and oil sectors, and attractive valuations compared to the US market. However, risks remain, including the potential for lower UK interest rates and economic uncertainty.

Past performance may not indicate future performance.