The British pound sterling exchange traded fund has been steadily appreciating, with the currency touching a four-and-a-half year high Thursday, as traders speculate on tightening Bank of England monetary policies.
The pound sterling touched $1.6842 against the greenback Thursday, its strongest since Nov. 18, 2009, reports Clare Connaghan for the Wall Street Journal.
Meanwhile, the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) remains relatively flat. The ETF has strengthened 2.6% over the past three months and rose 8.9% over the past year.
Traders are anticipating Bank of England rate hikes sooner rather than later after the U.K. government revealed the unemployment rate dipped faster-than-expected to 6.9%, a five-year low – the BoE has said before it was not ready to hike rates until unemployment fell below 7%.
“The report suggests that the labor market continues to tighten more quickly than the Bank of England expects increasing the likelihood of an earlier rate hike,” Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi, said in the article.
Additionally, house prices increased 9.1% in the year to February, the quickest growth spurt since June 2010, writes Connaghan in a separate WSJ article.
“The interest rate at 0.5% is really too low and needs to be hiked,” James Kwok, head of currency management at Amundi, said in the article. “The BOE will need to continue raising interest rates,” if it wants to stop the housing market turning into a bubble, Kwok argued.
The CurrencyShares British Pound Sterling Trust is based off a deposit account denominated in British pound sterling.
The stronger British currency can also help bolster returns for United Kingdom ETFs that do not hedge against the pound sterling. For instance, the iShares MSCI United Kingdom ETF’s (NYSEArca: EWU) tracks U.K. companies and does not hedge its currency risk, so a rising U.K. market coupled with a stronger pound sterling would translate to greater U.S.-dollar returns. EWU has gained 2.6% over the past month, but it is down 0.5% year-to-date.
CurrencyShares British Pound Sterling Trust
For more information on the pound sterling currency, visit our British pound category.
Max Chen contributed to this article.