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.
As recently as mid- to late 2014 expectations were in place that BOE would be one of the first developed markets central banks to boost interest rates, but inflation in the U.K. remained stubbornly low. 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.
“ING, Goldman Sachs Group Inc. and Rabobank International this week pushed back forecasts for a BOE rate increase into the fourth quarter of this year. Futures traders are even more pessimistic, with forward contracts based on the sterling overnight index average, or Sonia, not fully pricing in a quarter-point rate increase until after February 2017. The central bank will announce its latest decision on Jan. 14,” reports Bloomberg.
CurrencyShares British Pound Sterling Trust
