The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is off 1.7% over the past month, but currency traders should keep an eye on the British pound ETF in the near-term because the next several days could prove impactful for FXB.
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.
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.
“The U.K. currency has weakened against both the dollar and euro in the past week, as Bank of England Governor Mark Carney emphasized that eventual interest-rate increases will be gradual, while data confirmed the pace of economic growth in the nation slowed in the third quarter. In the next week, currency traders may be more likely to take their cues from elsewhere, as the ECB meets amid speculation it will boost stimulus,” reports Eshe Nelson for Bloomberg.
With conservatives strengthening their position in British parliament, winning 323 seats, some market observers believe this now is the time to consider U.K. equities and the related ETFs. On valuation, U.K. stocks are pricier than some major Eurozone markets, but attractively valued relative to other large developed markets, including the U.S.
“The pound has dropped more than 4 percent against the dollar since the middle of 2015 amid concern that U.K. economic growth is slowing and will weigh on the prospects for higher interest rates. Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a BOE interest-rate increase until after January 2017,” according to Bloomberg.
CurrencyShares British Pound Sterling Trust
