How to Trade the British Pound ETF
07/08/2011 7:00 am EST
Interest rate and monetary policy decisions from the Bank of England and European Central Bank will likely create volatility in this ETF, which tracks the British pound. Here’s what to watch for now.
Although Greece passed austerity measures last week, the Eurozone is not out of the woods on its debt crisis by a long shot. Further plans to help Greece could be viewed as a default by some ratings agencies, and Portugal was recently downgraded to junk status, casting further doubt over peripheral members of the Eurozone.
Nevertheless, the European Central Bank (ECB) is likely to continue to raise rates at future policy meetings, suggesting that even with all the troubles, a move higher in rates is warranted in order to help keep fast-growing economies like Germany in check.
Thanks to this likely move, the pressure looks to be on the Bank of England (BOE), which also meets today, as many traders will likely look for the Bank to make a move closer to raising rates in order to curtail rising inflation concerns, which are beginning to plague the British economy. Despite inflation that is above the BOE’s limit, the Bank has been slow to raise rates, unlike its counterpart in Frankfurt.
In fact, at the most recent BOE policy meeting, members voted 7-2 to keep rates on hold, even though inflation rates are fast approaching 5% in the country.
“In our view, the weakness in domestic confidence and demand together with indications of slowing global activity are likely to increase the pressure for more QE (quantitative easing) in the near term.” said Barclays Capital in a statement. “However, with inflation set to rise above 5%, we doubt that a majority of BOE monetary policy committee (MPC) members would support such a move. At the same time, unless there is a marked turnaround in the demand outlook, we think it unlikely that a majority will form around raising the policy rate. The outcome is likely to be a prolonged period of policy inertia.”
In fact, some analysts are even calling for the Bank to expand its QE program in the near future, increasing the level of asset purchases from their current level of 200 billion pounds.
”The May inflation report forecasts were notably higher than at other times when they have done more quantitative easing (QE),” Nick Bate, economist at Bank of America Merrill Lynch, said. While the Bank has made comments in the recent past that suggest that the BOE is open to more QE, analysts are only pricing in a one-in-four chance of this actually happening, and members of the Bank have taken steps in order to dispel a notion of further easing unless the economic situation significantly worsens.
”It always starts with our medium-term assessment of inflation…if we saw that sinking down toward deflation territory is I think where asset purchases would come in.” said BOE executive director Paul Fisher. “What would cause that to happen would be a sudden tip-over in growth now and that is a risk.”
Thanks to this key meeting and the increasingly divergent rates between Great Britain and its counterparts on the mainland, traders and investors should look for the CurrencyShares British Pound Sterling Trust (FXB) to remain in focus throughout the next few trading sessions.
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Here is a recent daily chart:
The fund tracks the GBP/USD exchange rate, measuring the relative value of the British pound against the US dollar.
So far in 2011, FXB has managed to gain a little under 2% against the greenback, a level that is far lower than many of its counterparts in Europe. In fact, the franc has gained over 10% against the dollar, while the euro, despite all its troubles, is up more than 7% as well.
A stronger commitment to tackling inflation is likely to help FXB in the days ahead, while any prospect of further QE or higher inflation in the final quarters of the year could send FXB lower against the greenback in Monday’s session.
If the ECB continues to raise rates despite concerns over many of its members and their debt loads, the pressure could begin to mount for the BOE to do something, especially given the very real inflation concerns facing the country, potentially setting up FXB for some very rocky trading in the days and weeks ahead.
By Eric Dutram, contributor, ETFdb.com