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.
Goldman Sachs “believes Britain will remain in the EU, but its macro markets strategy team has looked at what would happen to the pound if the vote goes the other way. It predicts that such an outcome would alarm foreign investors and put them off injecting capital into Britain, placing pressure on the current account deficit,” reports The Guardian.
Previously, currency traders saw the pound as one of the developed market currencies that could rally against the dollar because the Bank of England was likely to raise interest rates. That did not happen and now bets are that BOE stands pat.
CurrencyShares British Pound Sterling Trust
