As Big Ben chimed twelve times signalling the start of the new year, we all felt the sense of positivity to come in the new year. Of course 2016 had been economically eventful, but this year was already being labelled as being a very big economic year. This is because, Brexit is going to be the biggest talking point and factor affecting key economic changes like GDP growth, Sterling fluctuations, Stock Market trading, Interest rates decisions and the budget.
Early indications suggest that this year may bring positive economic news as the so called 'Santa Rally' has seen the Stock Market close at record highs in 12 consecutive days, as of the 13th January 2017. It can be argued that the 'Santa Rally' started mid-December because on 21st December 2016, the stock market closed at 7,041.42. Ever since, the FTSE 100 has closed on an increase compared to the previous year. On 30th December, the FTSE 100 closed for the final time in 2016 at a record high of 7,142.83. The markets opened on the 3rd January 2017, where the rally has continued since and as of the 13th January, it was at 7,337.81. It is thought that one of the possible reasons of the 'Santa Rally' was due to a lot of people buy 'cheap' stocks in December before their initial stock price rises in January, known as the 'January effect'.
However, the fall in the value of the pound has caused the stock market to increase, which is known as a negative correlation. This could be due to the fact that the fall in the pound has meant exports have become cheaper and then larger businesses can trade overseas, which means business can pick up. Another reason is that most of the businesses listed on the FTSE 100 gain their revenues in Dollars not Pound Sterling. This means that as the exchange rate between the Pound and Dollar falls, Dollar to Pound increases, which means profits/revenue of the businesses increase.
The pound continued to fluctuate like usual since Brexit but in the past days Sterling has plunged further. On 15th January, the value of one pound was at $1.21760 at 13:57 UTC compared to $1.24232 at 05:00 UTC on 6th January 2017. One reason is the approach Theresa May is going to have in negotiations- if we are heading towards a 'Hard' Brexit or 'Soft' Brexit.
We mustn't think about this as somehow we're coming out of membership but we want to keep bits of membership.
Theresa May spoke publicly on television in the inaugural Sophy Ridge on Sunday politics programme, aired on Sky News, for the first time this year on 8th January. She was repeatedly questioned over her position on Brexit and wherever or not we will remain in the Single Market. The cause in the plunge in pound was thought to come with her initial response that we won't be keeping 'bits of [the EU] membership', implying that the United Kingdom could negotiate to leave the Single Market. Wherever or not Theresa May meant this or not, it is open to interpretation but the pound did certainly fall due to the uncertainty this had created as on Monday the exchange rate went from £1= $1.22573. The stock market continued to increase and on Monday closed at another record high- 7,237.80.
This year will be a testing time for the UK economy as Brexit negotiations will begin and it is likely that the Stock market will continue to make gains with sterling plunging. Theresa May will make a speech on Brexit answering questions on Brexit and this is likely to make the value of the pound fluctuate.