Amid talk of Great Britain’s potential departure from the European Union, also known as Brexit, the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) has been under pressure this year. However, as the June Brexit vote nears, FXB has been finding firmer footing. For example, the exchange traded fund (ETF) is up about 1.1% over the past 90 days.
Investing in the forex market helps investors diversify and hedge with currencies, which may reduce portfolio risk while maintaining an upside potential. For instance, individuals holding assets denominated in a foreign currency are exposed to currency risks – if the foreign currency weakens compared to the U.S. dollar, the investor’s foreign investments will also depreciate in value once converted back to U.S. dollars.
Related: An ETF Hedge to Assuage ‘Brexit’ Fears
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.
“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]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.”
Related: Brexit Warnings Mount, Could Weigh on ETFs
“The BOE had decided to keep rates steady in a unanimous vote, but the central bank also recently slashed its growth forecast for the second quarter. The latest inflation report also indicated that economic growth would increase in the second half of the year. The BOE is targeting 0.9% inflation for the year, which gives the bank plenty of wiggle room to stimulate the economy. Economic data has been fairly soft of late, which could lead to further action from the BOE down the road. This, coupled with the Brexit fears, suggests that the danger to the Pound seems to be to the downside,” according to OptionsExpress.
CurrencyShares British Pound Sterling Trust
