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 (NYSEARCA: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 (NYSEARCA:FXF) has lost just over 10% thus far in 2010, while the Swedish Krona Trust (NYSEARCA: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.
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 (NYSEARCA:FXB), which tracks the British pound relative to the US 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.
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