Wall Street is continuing its winning streak as equities yet again posted broad based gain. Investor optimism has been improving since last Friday’s upbeat unemployment report, while yesterday equities rose moderately as investors are preparing for positive corporate results in the upcoming earnings season. The U.S. dollar continues to decline in the currency markets, while the Euro is marching higher on expectations of an interest rate hike by the ECB today (7:45am ET). Gold has been fairly cheerful lately, and today the precious metal rallied past $1,46o an ounce. Silver is going along for the ride as well, with May futures hitting a 31-year high around $39.70 an ounce [see Tuesday’s ETF Chart To Watch: iShares Silver Trust]. Crude oil futures climbed just past $109, holding back equities from extending greater gains later in the session.
Trends within the currency market are often times useful leading indicators in gauging viable forecasts for equity markets. The Bank of England and the European Central Bank are slated to release their interest rate decisions later today, and while rate hikes usually hurt equity markets (higher lending rates for companies) in the short/medium term, if either central bank raises rates it would be great news for its currency from a long-term perspective (banks are preparing against unfavorable inflation).
Rydex CurrencyShares British Pound Sterling Trust (FXB)
Investors interested in gaining exposure to the British Pound should consider FXB, issued by Rydex, which tracks the performance of the British Pound based on the GBP/USD foreign exchange rate relative to the U.S. dollar. The Bank of England is scheduled to release their interest rate decision at 7am ET later today, and the official rate has been flat at 0.50% since March 5th, 2009. On March 23d 2011 the Bank of England came out with their minutes, which is a detailed report of how the members voted along with forward looking commentary, and FXB sank. In our chart to watch analysis preceding the meeting on the 23rd, we outlined that FXB would likely sink lower towards $159.07 a share if the bank’s minutes were anything but bullish. Our technical analysis proved to be accurate, as the fund declined 2.4% from March 23d until hitting the projected support (around $159) on March 29th (daily low of $158.61). In the days following, FXB ran-up higher, and the fund is now trading around $162 a share again, just a dollar away from its recent resistance at the $163 level, which the fund has failed to break twice in March.
Looking ahead to today’s decision, the Bank of England’s Monetary Policy Committee is expected to hold rates constant. The UK has been seeing less than ideal growth as consumer and businesses confidence remains under pressure given rising commodity prices and a lackluster labor market. While inflation is the bank’s primary concern, it must also consider the effects of a rate hike and how that may potentially hurt the economic recovery, which is less than ideal to begin with. Many experts agree that the Bank of England still wants to see further signs of economic recovery before starting to raise rates, which would put great pressure on mortgage holders. The bank is faced with additional pressure given that recent economic data from the UK has been mixed. The Purchasing Manager Index surprised traders to the upside, coming in at 57.1 versus the forecast 52.6. On the other hand, Industrial Production was worse than expected, with month-over-month coming in at -1.2% versus the expected 0.4%, while year-over-year was 2.4% versus the expected 4.3% [see all the Currency ETFs here].
If rates are held constant, FXB will either modestly rise or sink, depending on the rhetoric of the commentary that is released along with the decision. Investors are not really expecting a rate hike, thus any pleasant surprises will likely send FXB higher, while conservatively-bullish commentary will likely push the pound higher even if rates remain unchanged. Considering the chart below, FXB has definitive resistance at the $163 level, while support lies between $158 and $160 a share.
FXB has failed twice already to break above $163, and for that reason investors should be worrisome of a potential triple-top. This would entail the fund hitting $163 (or slightly higher) a share, and subsequently selling-off and declining below $160, just as it has done twice already in March. Any bullish commentary following the bank’s rate decision would certainly help propel FXB past $163 a share. Also, the possibly exists that FXB will dip only to $161 a share, before resuming its long-term uptrend. The recent uptrend however needs to be re-evaluated if FXB closes below $159 a share, in which case further downside is likely and investors are advised to wait on the sidelines before jumping back in [see FXB Technicals].
Traders and investors alike are advised to stay out of the market and wait until after the Bank’s decision is released, and gauge the market’s reaction to the news before jumping in and establishing a position. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.