The FTSE 100 has hit a 10-month high, recovering from Brexit losses less than a week after markets took a pounding from the UK's shock decision to leave the EU.

The pound has also strengthened against the dollar and the euro, appearing to rally further (momentarily) after Boris Johnson's surprise announcement that he would not be running for Tory leadership.

By Wednesday, four trading days after the result, the FTSE 100 beat its pre-Brexit high of 6,338.1 at the close on Thursday June 23, just hours before referendum polls closed.

By the close on Friday it was trading higher still at 6,557.83.

Why is the FTSE 100 rallying?

After heavy losses on the FTSE 100 following the referendum results, investors took heart from the decision by policians to delay invoking Article 50, effectively delaying any further upheaval.

Investors started bargain hunting, buying up shares that had fallen in value.

"There is a confidence within the City that perhaps the implications to this vote may not be as immediate nor far reaching as many initially thought, providing opportunities for bargain hunters to grab shares at a discount," said Joshua Mahony, IG analyst.

Funding injections from the Bank of England, intended to shore up the UK financial sector, buoyed the market.

Then Mark Carney, Governor of the Bank of England, hinted he may cut interest rates below their historic low of 0.5 per cent. That would make it cheaper for banks to borrow money that they can then lend out for higher rates.

Why hasn't the pound also rallied?

The pound, which fell to 31-year lows after the results came out, has stabilised since but is trading signficantly lower than it was before the vote.

After hitting a low of $1.3148 against the dollar on Monday, it is now fairly flat at $1.3284.

That's bad for holidaymakers looking to make their money go further abroad.

But it is helping confidence in the FTSE 100 companies. The majority of FTSE 100 constituents are multinational companies that make a large proportion of their income overseas. As the pound drops in value, this income is worth more in the UK.

Cheap sterling can also reduce imports to and increase exports from the UK.

Why isn't the rallying FTSE 100 necessarily good news?

To get a better indication of the UK economy, it is helpful to look at the FTSE 250, or the 250 biggest companies in the UK, which is more dependent on the UK economy than the multinational companies represented in the FTSE 100.

The FTSE 250 fell 13 per cent in two days after the vote came in. It has recovered a little since then, but not on the scale of the FTSE 100. By close on Friday it was trading at 16,465.49, some way off its pre-Brexit high of 17,333.51 on Thursday June 23.

6 ways Britain leaving the EU will affect you Show all 6 1 /6 6 ways Britain leaving the EU will affect you 6 ways Britain leaving the EU will affect you More expensive foreign holidays The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more nito100 6 ways Britain leaving the EU will affect you No immediate change in immigration status The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay Getty 6 ways Britain leaving the EU will affect you Higher inflation A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum AFP/Getty Images 6 ways Britain leaving the EU will affect you Interest rates might rise The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output Getty 6 ways Britain leaving the EU will affect you Did somebody say recession? Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018 AFP/Getty Images 6 ways Britain leaving the EU will affect you And we wouldn’t even get our money back All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget Getty Images

Confidence in domestic companies is low because the outlook for the UK economy doesn't look good. There's a much higher risk of recession, according to Standard & Poor's, who put the likelihood of recession in the next 12 months between 20 and 25 per cent, compared to 15 and 20 per cent in March.

George Osborne, the Chancellor, has abandoned his target of reaching a budget surplus by 2020. That will come as a relief to those who believe greater public sector spending will be necessary to address the knock on effects of the slowing economy.