The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is off nearly 4% over the past year. With the Federal Reserve poised to raise interest rates several more times this year and market observers thinking the Bank of England (BOE) will be forced to put off doing the same, the dollar could be headed for more upside against the pound.
The weaker British currency can also weigh on 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.
Last week, sterling fell to its lowest levels in more than five years as investors eschewed riskier assets in favor of safe-havens, such as the Japanese yen.
“The turmoil, and subsequent tumble in commodity prices, is making analysts and traders more pessimistic on the outlook for the BOE’s first rate-increase since 2007. That means next week’s meeting may be overshadowed by the fallout from events in China, according to Viraj Patel, a currency strategist at ING Bank NV in London,” reports Bloomberg.