European markets jumped on Wednesday after Portugal’s successful bond market offering in which the government sold 1.25 billion euros ($1.62 billion) of sovereign debt. Wall Street likely followed the good news from overseas and extended gains as well, with the Dow Jones Industrial Average and S&P 500 Index both popping nearly a full percentage point each. The SPDR Financial Sector ETF (XLF) gained over 1.5% after Portugal debt fears evaporated and a recommendation from Wells Fargo to buy large U.S. banks, based on the firms improving expectations of earnings and dividends growth in the banking sector. Meanwhile, in commodity markets, gold managed to stay afloat and hold its ground despite the broad rally in the equities market thanks to ongoing weakness in the U.S. dollar which declined against most major currencies. Treasurys on the other hand inched lower for the session, with the iShares Barclays 20 Year Treasury Bond Fund (TLT) shedding a little over half a percentage point on the day.
Today’s ETF chart to watch is the CurrencyShares British Pound Sterling Trust (FXB), given the ongoing focus on European currency markets as well as the Bank of England announcing its interest rate decision later today. FXB tracks the British pound and moves according to the exchange rate between the British pound versus the U.S. Dollar. The interest rate decision is scheduled to be released at 7:00 am (ET). Analyst are expecting the Bank of England to keep rates unchanged at 0.5%, given that most central banks seem to be following the wait-and-see approach– at least in developed markets– by patiently observing global economic progress before tightening their benchmark rates. The British pound has had a tough year along with its counterpart across the Channel, but has been relatively solid so far this year gaining 0.67% year to date [see FXB Fundamentals].
Look for trading volumes to pick up as FXB makes its move in accordance with investor sentiment, and buyers and sellers adjust their positions based on the bank’s decision along with any additional commentary the leaders of the bank might offer. Fears of inflation have taken a backseat, as the U.K. has become more focused on sustaining growth, since small monetary adjustments could lead to significant setbacks for the already slow recovery [see Three ETFs To Watch As China Invests In The Euro Zone].
Looking at a daily chart of FXB starting in 2009, along with the 200-day simple moving average, it’s not terribly difficult to notice longer-term trends and how the fund has alternated between trading above/below the blue-line moving average. Looking at more recent developments, FXB has managed to bounce off of its 200 day moving average, which is suggesting that the recent uptrend from June 2010 is still relevant. With the Portugal debt fears temporarily off of investor’s minds, FXB has enjoyed a nice steady rise over the past week, as you can see in the chart above.
However, the picture is not as pretty as it may appear; growth is still stagnant across developed markets, and there have been no major economic developments in the U.S. or abroad to give evidence that job creation is returning at any meaningful levels. Also, looking at FXB’s monthly chart above, it is clear that the fund has struggled before to break above the $160 mark, which could potentially create a roadblock for the fund going forward. The stochastic momentum index is also showing that the fund may be overbought from a longer-term perspective, further suggesting the possibility of a downward price movement in months to come.
Short term upside toward the $160 mark is a possibility, but its critical to keep in mind that the fund has been trending lower (monthly chart above) since November 2010. Traders and investors of all experience levels are advised to use stop-loss orders and observe profit-taking techniques, especially when playing currencies ahead of a central bank meeting.
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Disclosure: No positions at time of writing.