U.K. manufacturing fell for the first time in April in three years dealing a blow to the pound. The decline was largely unexpected. As per Markit Economics , factory Purchasing Managers Index dropped to 49.2 in April from 50.7 in March. The key level of 50 divides expansion from contraction.
The Markit report also stated that several jobs were lost in the industry over the past three months. The country's export orders were also down for the second straight month on weaker global market conditions. Although the pace of decline moderated, it can't be ignored that both costs and output prices fell in April.
Last week, it was reported that Britain's economy slowed significantly in the first quarter of 2016. The gross domestic product growth was 0.4% in the first quarter, which compared unfavorably with 0.6% in the fourth quarter of 2015.
These negative reports further shake investors' confidence in the British economy, which is already shrouded in uncertainty with June 23 drawing closer when Britain will vote on whether the UK should remain a member of the EU.
Last month, Treasury came out with a long-term economic analysis. As per the report, a potential exit from the EU would reduce Britain's GDP by 6.2% in 2030. British finance minister, George Osborne, stated that "a vote to leave the EU would do permanent damage to the country's economy" and "families would be £4,300 worse off and tax receipts would face an annual £36 billion black hole" (read: British ETFs in Focus on Brexit Talks ).
Meanwhile, several market participants believe that a "Brexit" would lead to a weaker currency owing to worries about Britain's £229 billion annual trade with the EU, which could suffer if new trade barriers are raised. One of the major advantages of the EU is free trade between member nations, which makes exporting goods to other EU countries easier and cheaper for British companies. So, Brexit could have a negative impact on Britain's GDP. Lower GDP growth and tougher export conditions would hit several sectors like retail and financial services among others and therefore have an unfavorable impact on British equities (read: Best Performing Currency ETFs of Q1 ).
In this scenario, we highlight two sterling currency funds, which are likely to be on investors' radar in the coming days (see: all Currency ETFs here ).
Guggenheim CurrencyShares British Pound Sterling Trust (FXB)
The fund tracks the price of the British Pound Sterling. With the UK currency in a tight spot, the fund lost 1.2% in the last 2 days (as of May 4, 2016). With AUM of $49.8 million, it is the most popular pound ETF. The ETF has an expense ratio of 0.40% and trades in a volume of around 19,000 shares a day. The fund has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top and Flop Currency ETFs YTD ).
iPath GBP/USD Exchange Rate ETN (GBB)
With AUM of $0.8 million, the fund provides exposure to the British pound/U.S. dollar exchange rate. The fund lost 0.5% in the last 2 days (as of May 4, 2016). The ETF has an expense ratio of 0.40% and trades in light volume of less than 1,000 shares a day and has a Zacks ETF Rank #3 with a High risk outlook.
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