The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is off 2.7% year-to-date, but sterling’s struggles could soon evaporate as the Federal Reserve waits on raising interest rates and currency traders continue pointing to the Bank of England as likely to boost borrowing costs.
The U.S. dollar has developed a reputation, well-deserved at that, for being one of the strongest currencies in the world for more than a year. However, the Federal Reserve’s recent decision to pass on raising interest rates could be a black cloud over the greenback.
Another developed market currency, one that can be accessed by an exchange traded fund, could get the benefit of rate hike in the near-term and could be bad news for the dollar, but good news for FXB.
“The U.K. currency ended its longest run of quarterly gains versus the euro since the inception of Europe’s shared currency in the three months through September amid debate about when the BOE will tighten policy. When the central bank kept its key rate at a record-low 0.5 percent at its September meeting, Ian McCafferty was the lone official on the nine-member Monetary Policy Committee to vote for an increase,” reports Lucy Meakin for Bloomberg.
But sterling and FXB could be the securities as some market participants are betting the Bank of England is inching closer to boosting borrowing costs. [Opportunity With Sterling Hedged ETFs]
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.
“Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase to the BOE’s key rate won’t come until after November 2016,” according to Bloomberg.
However, some traders also believe the dollar is poised to resume its rally.
“Traders see a 43 percent probability of a move by the Fed’s Dec. 15-16 meeting, according to futures data compiled by Bloomberg. The chances are 51 percent by the January meeting and 64 percent by the March gathering, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff,” according to Bloomberg.
CurrencyShares British Pound Sterling Trust
