The last few months haven’t been kind to many European currency ETFs, which have seen prices plummet due to ongoing fears over a building sovereign debt crisis. While this wave of anxiety has done the most damage to euro funds–the Rydex CurrencyShares Euro Trust (FXE) is down more than 15% on the year–other service-based countries in Europe have also seen their currencies suffer as well. The CurrencyShares Swiss Franc Trust (FXF) has lost just over 10% thus far in 2010, while the Swedish Krona Trust (FXS) has seen its price fall by 9.9%. However, arguably the most endangered currency in Europe is the British pound, which has sunk by just over 10% year to date and looks to continue its slide on bearish market sentiment and data releases (also see Forget About Euro ETFs, British Pound ETFs Are The Real Danger).
This bearish outlook for the pound comes after a sharp uptick in producer prices in the UK; annual inflation for all manufactured products rose 5.7% in May while input price annual inflation rose 11.2% for the month, compared to a rise of 13.1% in April. These numbers suggest that inflation may be coming to the British Isles, a theory further supported in a Bank of England report showing that Britons’ inflation expectations climbed to the highest level since August 2008, at 3.3% a year.
Furthermore, the British find themselves between the proverbial rock and a hard place in terms of their budget deficits, with the ratings agency Fitch threatening that the country may lose its AAA rating if enough is not done over the near-term to bring spending under control. Due to this, investors are demanding that the country reduce its budget deficit, which is by far the worst of the G-7 countries, in order to get its fiscal house in order. Others believe that a sharp decrease in spending will leave the country mired in recession, suggesting that no matter what the new British government decides to do, the pound will likely suffer.
FXB: The Most Liquid Way To Play The Pound
All of these factors have helped to keep pressure on the pound and send the Rydex CurrencyShares British Pound Sterling Trust (FXB), which tracks the British pound relative to the U.S. dollar, lower by almost 1% to end the week. This momentum looks likely to continue in the short-term, with the storm clouds over the pound unlikely to clear in the immediate future (see technical analysis of FXB here).
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Disclosure: No positions at time of writing.