Pound ETF Jumps as BOE Hints at Rate Hikes
June 13th, 2014 at 4:10pm by Tom Lydon
The British pound, along with related currency exchange traded fund, jumped to a three-week high against the greenback after the Bank of England hinted that rates could rise sooner than expected, with some pointing to rate hikes as early as the first quarter of next year.
The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) gained 0.8% Friday. FXB is up 1.2% over the past three months and 1.5% higher year-to-date.
“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Bank of England Gov. Mark Carney said, according to the Wall Street Journal. “It could happen sooner than markets currently expect.”
Carney’s hawkish statement caught the currency market off guard, bolstering the pound sterling.
“He’s sounding more hawkish than the markets were expecting,” Brad Bechtel, managing director at Faros Trading, said. “Carney seemed to be pre-warning the market. The pound is rising as you would expect; it’s rising sharply against the dollar and the euro.”
The British pound sterling gained about 0.2% Friday, strengthening to 1.6969 per U.S. dollar. Currency traders are looking for the GBP to hold at the 1.7 level.
“While Carney provided no detail of how soon rates could rise, it is unlikely that he would have made such a bold statement without a real possibility that rates could rise this year,” Lloyds Bank analysts said in a Pound Sterling Live article.
Average economists’ estimates point to a rate hike as early as the first three months next year, compared to earlier expectations for a rate change in the second quarter, reports Atul Prakash for Reuters.
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 is up 4.2% year-to-date. [U.K. ETF Flirts With Six-Year Highs]
CurrencyShares British Pound Sterling Trust
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.