These are not good days for the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB), which tracks the British pound’s movement against the U.S. dollar. Down more than 10% year-to-date, FXB is easily one of this year’s worst-performing currency exchange traded funds and its post-Brexit slump has not shown any signs of abating.
While Britain has voted to leave, the country is not out of the E.U. yet. Senior E.U. officials have stated that the U.K. should immediately follow Article 50 as part of the process by which a member state leaves the E.U.
The Article states that the U.K. would negotiate and settle arrangements for its withdrawal, taking account of the framework for its future relationship with the Union, the Washington Post reports. The leaving member will be given two years to comply.
Although the Bank of England keep rates on hold at its most recent meeting, some market observers believe a rate cut is coming in the near-term and that would likely mean more weakness for the pound.
Compounding the pounds potential woes is the fact that although BOE did not lower interest rates at its last meeting, some traders are betting that there is a 100% chance that lower rates in the U.K. are seen by the end of this year, perhaps as soon as BoE’s next meeting.[related_stories]
“The political shakeup has resulted in a new prime minister, cabinet, a new government ministry for EU negotiations, mass resignations from the Labour shadow cabinet, and an extremely contentious race for leadership of the Labour Party. Prime Minister Theresa May has walked an extremely delicate line, declining to specify a date when the United Kingdom will trigger Article 50, the two year process for a member state to leave the European Union. The Prime Minster has recently met with Angela Merkel of Germany and Francois Hollande of France to discuss the timing of EU negotiations,” according to OptionsExpress.
Looking ahead, this Brexit vote could trigger another Scotland referendum on breaking away from the United Kingdom. A 2014 referendum on Scottish independence resulted in the country remaining with the U.K., but the results were largely contingent on E.U. membership.
While that is not a foregone conclusion, the path of least resistance in the near-term appears to be lower for sterling and FXB.
“The pound’s “20 day Simple Moving Average (SMA) has shown a steep downward trend, just recently leveling off due to the extremely tight recent trading range, and is well below the 50 day SMA. Although resistance is found at the pre-referendum levels of 1.50, that level seems almost impossible to reach and the short term resistance level of 1.35 seems more applicable to traders,” according to OptionsExpress.
For more information on Brexit, visit our Brexit category.
CurrencyShares British Pound Sterling Trust
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.