Is The Bearish Run Over For British Pound ETFs?

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 are 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 the 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, 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 (FXB – Free Report) and iPath GBP/USD Exchange Rate ETN (GBB – Free Report) – 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.