After ranking as one of last year’s worst-performing developed market currency exchange traded funds, the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is trading lower to start 2017 and analysts remain less than enthusiastic regarding the pound’s upside prospects.
The pound has been the worst performing asset since the U.K.’s decision to leave the E.U. last June, and the majority of analysts who’ve changed their forecasts since the referendum results are now projecting the currency to remain depressed.
A formal Brexit announcement could come as soon as today and that has some market observers concerned about sterling’s near-term prospects.
“EUR/GBP upside is also supported by the macro outlook and political developments in the UK. There are signs that momentum in UK economic activity is weakening and we expect lower growth in coming months. Article 50 could be triggered as soon as this week and news that European leaders will not make the divorce easy should lead to a more negative risk premium being built into the currency,” according to a Goldman Sachs note posted by Shuli Ren of Barron’s.
Sterling still faces multiple challenges as Great Britain sets out on its Brexit course. British Prime Minister Theresa May is aiming for a swift departure from the European Union (EU) while some market observers around the world are hoping for a more measured approach.
U.K. stocks and ETFs are dealing with sterling weakness. For example, the iShares MSCI United Kingdom ETF (NYSEArca: EWU), the largest U.K. ETF trading in the U.S., is up 3.3.% this year.
Currency hedged ETFs, including the iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU), WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) and Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK), are benefiting from sterling weakness.
Other issues could confound sterling, too.
“The threat of another Constitutional crisis with referenda in Scotland and possibly Northern Ireland, in parallel with Brexit negotiations with the EU, may sap confidence in the outlook for sterling assets. If in one way or another the threat of a referendum helps to extract concessions for Scotland/NI and softens the overall hard Brexit tactics of the UK government, then this could cushion another fall in the GBP,” according to a Societe Generale note seen in Barron’s.
For more information on the GBP, visit our British pound category.