Wednesday’s ETF To Watch: British Pound ETF (FXB)

by on August 18, 2010 | ETFs Mentioned:

The euro-zone has been in focus for much of this year, as the common currency has endured the most serious test to its viability in the bloc’s relatively brief history. With all of the attention aimed at the 16 countries that have adopted the euro, European nations outside of this group were often overlooked. In particular, the fiscal woes of the U.K. have largely flown under the radar; the British find themselves in one of the worst financial positions in the developed world [see Forget About Euro ETFs, British Pound ETFs Are The Real Danger]. The struggling economy has managed to slide past the eyes of the general public focused more intently on the immediate dangers in the euro zone. Now with concerns about the euro subsiding (somewhat), scrutiny of the British economy–with its high budget deficits, unemployment and inflation–is intensifying. This triple threat leaves the country’s central bank in a perilous position: unable to cut rates much further to stimulate much-needed growth and unable to raise them in order to keep inflation in check and confidence in the pound sterling. 

In the past several days, the U.K. has released many telling reports on its economy. Last Tuesday, the British posted a consumer confidence level that was lower than anticipated. Then a day after, the poor data piled on as the country disappointed with its GDP outlook. Though GDP grew in the second quarter, the outlook for the remainder of 2010 was weak, crushing investor confidence in the already battered pound. To top it all off, the bank boosted the inflation outlook, and said that it does not see rates falling below 2% until at least 2012; inflation is currently around 3% for the nation.

In the wake of these less-than-inspiring reports, today’s release of the minutes from the Bank of England’s most recent meeting will be eagerly anticipated by investors. For starters, they will be looking for hints at any more quantitative easing programs or a change in the outlook on interest rates.

The minutes are in depth notes taken from the meeting, giving the public insight into how the bank plans to move forward. The bank seems likely to keep its doveish outlook–meaning that they will try and keep interest rates low–for the second half of the year. However, if the Bank of England signals that inflation is getting out of control and that rate hikes are in the near future, it could give a much needed boost to the pound. The minutes could help to signal the level of confidence, or lack thereof, that the British central bank has in its economy [see also Currency ETFs: A Better Way To Play The BRIC?].

In light of this announcement, the CurrencyShares British Pound Sterling Trust (FXB) looks to be in focus today. This currency ETF offers exposure to the British Pound, which has plummeted against the greenback for much of 2010. A continued lack of confidence could continue that trend, while a reversal in the interest rate outlook could give FXB a boost.

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Disclosure: Photo courtesy of Joseph Plotz. No positions at time of writing.