The British pound exchange traded fund is marching toward a six-year high as the improving economy and rising inflation fuel speculation of a Bank of England rate hike.
The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) rose 0.4% Tuesday. FXB has strengthened 2.9% year-to-date and is trading near its highest level since 2008.
Meanwhile, the pound touched an intraday high of $1.7192, the highest level since October 2008.
United Kingdom inflation rose to a greater-than-expected 1.9% in June from a four-and-a-half-year low of 1.5% in May, Reuters reports.
“We have been long the British pound and bearish on gilts on the belief that the improving economic fundamentals may prompt the Bank of England to be the first among the leading developed central banks to tighten monetary policy via an actual rise in interest rates,” Scott Thiel, deputy chief investment officer of fundamental fixed income at BlackRock Inc., said in a Bloomberg article. “The new inflation data have done nothing to dispel that view.”
BOE Governor Mark Carney has maintained that borrowing costs could rise sooner-than-expected and rate decisions will continue to be “data driven,” such as the changes in inflation rates.
“We are still seeing inflation surprise to the upside,” Adam Cole, the head of Group-of-10 currency strategy at Royal Bank of Canada, said in the Bloomberg article. “It should work towards lifting U.K. rate expectations, which is clearly why sterling is taking it positively. We would see value in expressing that view in the currency at these kind of levels.”
Nevertheless, inflation remains below the central bank’s 2% target. Additionally, BOE officials have stated that they want to see unemployment decline further and average wages rise before hiking rates, the Wall Street Journal reports.
The stronger British currency can also help bolster returns for United Kingdom ETFs that do not hedge against currency risks. For instance, the iShares MSCI United Kingdom ETF’s (NYSEArca: EWU) tracks U.K. companies and is exposed to shifts in the Forex, so an expanding U.K. market coupled with a stronger pound could translate to greater U.S.-dollar returns. EWU is up 4.5% year-to-date.
CurrencyShares British Pound Sterling Trust
For more information on the cable, visit our British pound category.
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.