Brexit Boondoggle for the Sterling ETF

The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is down 1.7% year-to-date, an admirable performance particularly when considering escalating Brexit speuclation. “Brexit” refers to Great Britain’s potential departure from the European Union.

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.

A referendum on Brexit is not expected until the late second quarter or early third quarter and even ambitious estimates say there is just a 30% chance of Brexit coming to pass. Still, sterling remains one of the worst-performing developed market currencies in the world this year.

“Sterling depreciated against most of its 16 major peers this week as Prime Minister David Cameron stepped up lobbying efforts to reach a deal that may allow him to hold a vote as early as June. A date is only likely to be set, though, following the EU summit in Brussels on Feb. 18-19. Reports next week are forecast to show inflation and wage growth remained little changed, according to economists in Bloomberg surveys,” reports Manisha Jha for Bloomberg.