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Brexit Talk Pressures Pound ETF

With the vote determining Great Britain's fate in the European Union just over a week away, it is not surprising that the British pound and the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB ) , one of this year's most controversial currency exchange traded funds, are spending plenty of time in the spotlight.

Polls show mixed results, with online surveys revealing a much closer result while phone calls have suggested a lead for a remain. Sterling has acted as a barometer of sentiment in the run-up to the June 23 referendum, hitting a seven-year low against the U.S. dollar in February after the date of the vote was announced.

Related: Brexit Sends Sterling ETF to All-Time Low

Sterling has acted as a barometer of sentiment in the run-up to the June 23 referendum, hitting a seven-year low against the U.S. dollar in February after the date of the vote was announced.

The government and the Bank of England have both said that a Brexit would hurt the economy. Moody's also warned that it could downgrade U.K.'s credit rating if the country leaves the union. By leaving the union, the UK would need to negotiate a new trade agreement with the EU that would preserve some of the trade benefits of EU membership. Consequently, without the union, UK exporters would be pressured. The depressed GDP growth and more difficult export conditions would impact sectors like financial services, exporters, retail and property, which would also have an adverse effect on British equities.

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"Looking at the Implied Volatility (IV) curve, we see that the IV30 is greater than the IV60, which is greater than the IV90. The implied volatility on the British Pound ETF is in steep backwardation. This means volatility is particularly expected in the near term. I would expect the near-term IV to decline sharply once the news is released. Technicians often like to say it is best to ignore news, however there are situations in which news drives market and trading action. Clearly, this news announcement is driving options pricing in the British Pound ETF and trading positioning in the GBPUSD," according to See It Market.

Related: Sterling ETF Finds Footing Ahead of Brexit Vote

Brexit threat comes from a weaker British pound sterling and a hit to economic activity as an exit would remove the country's favorable trade agreements - the EU enjoys free trade between member states, which makes exporting cheaper and easier for British companies. According to a May Markit/CIPS PMI survey of companies, over one-third of companies reveal that the uncertainty over the Brexit vote has contributed to a detrimental effect on their businesses.

FXB has "a declining 200-day moving average, indicating a bearish longer-term trend (as would be expected with a 1-year chart in a downtrend). The nearer-term moving averages (20 and 50) have turned flat after a short-term uptrend in price from the end of February through May. The last few days have caused damage to the chart - breaking both the uptrend line from February. The RSI indicator at the top of the chart shows momentum, thought to lead price, broke its trend in late May. The price chart implies a bearish leaning heading into the Brexit vote," adds See It Market.

For more information on Brexit, visit our Brexit category.

CurrencyShares British Pound Sterling Trust

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article was provided by our partner Tom Lydon of etftrends.com.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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