The British pound yesterday broke through the $2 mark for the first time in nearly 15 years and a good question is what impact this will have on the UK exchange-traded fund (NYSEARCA:EWU). Traders may have been reacting to new data that showed an unexpected surge in inflation, prompting speculation of interest rate increases.
While a rising currency helps the performance of foreign country iShares ETFs since they are not hedged against the U.S. dollar, rising rates usually hurt a stock market because it leads to slower economic growth.
However, there are times when increasing rates are seen as a positive for markets since it signals responsible monetary management to stem inflationary pressures.
Jane Wardell writes that the rising CPI rate, well above the Bank of England's target of 2 percent, adds pressure for a further rise in official interest rates, which are currently at 5.25 percent. The bank has raised the base rate by three-quarters of a point since August and economists had been predicting one more rise in the coming months to close off the current cycle of increases -- but the data has prompted speculation about more than one hike.
Another way to play the rising British Pound is through the CurrencyShares British Pound (NYSEARCA:FXB) ETF.