The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB), which tracks the movement of the British pound against the U.S. dollar, is down more than 4% year-to-date, making it one of the worst-performing developed market currency ETFs.
Most, if not all, of FXB’s struggles can be attributed to fears that Great Britain could opt to leave the European Union when a referendum on the matter is held in late June. With just over two months before that referendum, speculation is intensifying regarding how harshly the pound will be punished if Great Britain departs the European Union.
Earlier this year, FXB hit an all-time low as speculation intensified that Great Britain’s departure from the European Union is a real possibility. Market observers almost universally believe such an event would be pound negative. Moody’s has warned that it could downgrade U.K.’s credit rating if the country leaves the union. Some well-known asset managers and banks are chiming in, confirming that the pound and British stocks could suffer in the wake of a “Brexit.”
By leaving the union, the UK would need to negotiate a new trade agreement with the EU that would preserve some of the trade benefits of EU membership. Consequently, without the union, UK exporters would be pressure. The depressed GDP growth and more difficult export conditions would impact sectors like financial services, exporters, retail and property, which would also have an adverse effect on British equities.
“If Britain leaves the EU, it is likely that the pound will weaken significantly directly after. An “out” vote will mean that it is likely confirmed that the UK will begin the process of exiting from the EU and investors (both foreign and domestic) will quickly start liquidating their UK assets and move them into euros, US dollars, or other currencies,” according to a Canton FX note posted by Business Insider.
[related_stories]By leaving the union, the UK would need to negotiate a new trade agreement with the EU that would preserve some of the trade benefits of EU membership. Consequently, without the union, UK exporters would be pressure. David Page, an economist at AXA Investment Managers, on Financial Times argues that a Brexit could cause significant adverse impact on economic activity, with gross domestic product to be 2% to 7% lower.
Britain’s departure from the European Union could send “investors scrambling to move money from the UK, cause huge amounts of uncertainty in the markets, and weaken sterling significantly,” reports Business Insider.