Is The Bearish Run Over For British Pound ETFs?

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Includes: FXB, GBB
by: Zacks Funds

British Prime Minister Theresa May stunned investors with a surprise announcement to hold a snap general election on June 8, three years ahead of the 2020 schedule. Resistance from opposition parties and members of the House of Lords to Brexit negotiations prompted Theresa May to take this decision.

The early election will increase May's mandate in Brexit talks and makes the process successful. It would bring certainty, stability, unity, and strong leadership in the country. May's ruling conservative party is leading by 17% according to a recent BBC analysis of recent polls, while the lead is 21 points over the main Labour opposition party for the first time in nine years as per the YouGov survey for the Times at the weekend. This suggests that May has a higher chance of increasing her majority in parliament.

However, the government needs two-thirds majority in parliament to call a snap election. If approved, the parliament will dissolve 25 days before the election on May 3.

Market Impact

While the move knocked down UK stocks with the FTSE 100 logging the worst day since the Brexit vote, it led to surge in the British currency. Notably, the pound jumped as much as 2.37% to a six-month high against the dollar and hit a four-month high against the euro.

Deutsche Bank (NYSE:DB), which has been pessimistic about the pound since Britain voted to leave the European Union, has turned bullish immediately and will raise its forecast for the pound in the coming days. The analyst believes the snap election will be a game changer for Brexit negotiations and British currency. This is because it would result in a larger and more stable conservative party majority that would reduce the likelihood of a so-called 'hard Brexit' and lead to a smooth departure of Britain from the European Union by 2019.

In the ETF world, the two British currency products - CurrencyShares British Pound Sterling Trust (NYSEARCA:FXB) and iPath GBP/USD Exchange Rate ETN (NYSEARCA:GBB) - gained 2.2% and 1.6%, respectively, on the day following the news. Both the funds appear a great way to play the future rise in the sterling pound relative to the U.S. dollar.

ETFs in Focus

FXB has amassed $288.4 million in its asset base and trades on a moderate volume of 95,000 shares a day. The product has an expense ratio of 0.40%.

GBB is an ETN option and thus failed to attract investors with just $4.2 million in AUM and about 1,000 shares in average daily volume. It also charges 40 bps in annual fees from investors.

Investors should note that both products have a long-term Zacks ETF Rank of 4 or 'Sell' rating, indicating some pain ahead. But a near-term trend reversal suggests that these have the potential to move up in the coming days if the current trends persist.

Technical Look

To get more ideas about the expected movement of these funds, look at the technical chart:

The above chart for FXB shows that it has recently broken its near-term range and its near-term moving average (9-Day EMA) has managed to go above the short-term average (50-Day EMA), reflecting some optimism for this ETF. This is further confirmed by an upswing in Parabolic SAR, although this figure should definitely be monitored closely.

However, the near-term moving average is far from the long-term moving average (200-Day EMA) and the Relative Strength Index (RSI) is around 70.74, suggesting that the ETF is near its overbought territory. To sum up, the fund could witness some upside in the near term but this may not continue for long.

Similarly, the price chart for GBB also exhibits somewhat similar characteristics with the near-term moving average being higher than the short term, but lower than the long term with RSI of 70.94.

In Conclusion

Investors having a strong stomach and patience for extreme volatility could get into these funds to take advantage of the trend reversal in the near term. But the long-term outlook remains bleak.

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