As the third quarter marches on, many investors are curious to see if yesterday’s broad rally in American markets will carry over into Asia and Europe today; the continent of Europe could especially use a boost given the recent turmoil that many euro zone economies have suffered. The economies of Spain, Greece, and Hungary have been subject of the most intense scrutiny, while Great Britain has managed to slip under the radar despite having an extremely weak economy and growing concerns over rising debt levels and surging inflation (it currently stands at 3.4%). This level of inflation is extremely high compared to near-deflationary levels in much of the rest of the developed world, and is attributable primarily to austerity programs and record low interest rates. However, with such a weak economy it is hard to justify raising rates, a dilemma that sent the pound sharply lower year to date [also read Forget About Euro ETFs, British Pound ETFs Are The Real Danger].
In addition to these ongoing concerns, the British pound looks to be in focus today due to a variety of data releases that could impact the currency. First up are the change in British manufacturing production and the change in industrial production. Both numbers are projected to increase modestly from a 0.4% decline last month and look to show if the British economy is weathering the sovereign debt storm and is able to capitalize off of a sharply lower currency by increasing the number of goods available for export.
Later in the day, the Bank of England will give its decision regarding interest rates and the number it is targeting for an asset purchase program. While both numbers are expected to remain unchanged (0.5% for rates and 200 billion for the asset purchase program) it will be interesting to see what guidance the Bank gives in regards to its strategy to begin monetary tightening, especially given recent inflation concerns (currently running at twice the level of the euro zone). Moreover, there has been some dissent among the Bank of England ranks; at last month’s meeting one of the external members of the committee, Andrew Sentance, voted in favor of an interest rate increase of 0.25 per cent, to 0.75 per cent.
For these reasons, we make the Rydex CurrencyShares British Pound Sterling Trust (FXB) our ETF to watch for the day. The fund charges an expense ratio of 40 basis points and it is down 6.1% so far in 2010. However, FXB has been surging as of late–posting a gain of 5.3% over the past month–and looks to continue this gain going after today’s all important data releases [see technical analysis of FXB here].
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Disclosure: No positions at time of writing.