The British pound today 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 (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 positve 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 (FXB) ETF.
By Carl Delfeld of the Chartwell ETF Advisor