FXB: Elections Have Consequences (NYSEARCA:FXB)

On July 4, 1776, the United States was born, as the founders signed and adopted The Declaration of Independence. The U.S. became an independent country, severing political connections with Great Britain. Ironically, another, albeit smaller, political revolution occurred in the United Kingdom on July 4, 2024. After fourteen years in power, the conservative party, or Tories, lost control of the Parliament to the Labour Party. Keir Starmer, the Labour Party leader, took over as Prime Minister, replacing Rishi Sunak, who had served in the position since 2022 after he replaced conservative leader Liz Truss after a short stint in the position, and Boris Johnson, who served as Prime Minister from 2019-2022.

Markets reflect the economic and political landscapes, and elections can have significant consequences. Over the few days since the election, the British pound has rallied against the U.S. dollar. The Invesco CurrencyShares® British Pound Sterling Trust ETF (NYSEARCA:FXB) moves higher and lower with the British pound against the U.S. dollar.

The knee-jerk reaction is bullish as the pound rallies against the U.S. dollar

The election results came as little surprise, as the polls had indicated a looming victory for the Labour Party over the Conservatives. The pound began moving higher against the U.S. dollar on July 2.

The short-term chart highlights that the pound-dollar currency pair moved 1.82% higher from $1.26156 on July 2 to its latest $1.28458 on July 8. Short-term technical resistance is at the June 12, 2024, $1.28600 high, just slightly above the July 8 peak.

A significant political shift in the U.K.

With 650 Parliamentary seats up for grabs in the July 4 election, Labour’s 412 seat victory amounted to a landslide.

Prime Minister Starmer’s Party picked up 214 seats, while former leader Sunak’s lost 252 seats. Some of the surprises in the election were that former Prime Minister Liz Truss lost her seat, and Nigel Farage’s right-wing populist party, Reform U.K., picked up five seats. While the representation of the Reform U.K. Party will be nominal, the raw vote tells a different story.

The chart shows Reform U.K. received the third most votes, behind Labour and the Conservative parties, and ahead of the Liberal Democrats. Since supporting BREXIT, Nigel Farage has become an increasingly popular U.K. leader. He is also closely tied to former U.S. President Donald Trump.

While the U.K. Labour Party resembles U.S. Democrats, the rising popularity of Reform U.K. tells us about the increasing political divisions within the U.K. If the Conservative Party had received all the Reform U.K. votes, it would have eked out a narrow victory over Labour instead of the landslide defeat.

The U.S. dollar-Volatility on the horizon

Markets hate uncertainty. A significant political victory and Parliamentary majority for the U.K. Labour Party with a center-left Prime Minister provides more confidence, translating to a slight post-election rally in the British pound-U.S. dollar currency pair.

Meanwhile, the November U.S. election remains an event that could cause wild price variance in currency markets. The first Biden-Trump debate presented issues for the incumbent President that could derail his campaign. President Biden’s performance has led to trailing in polls and calls for a replacement from a rising number of Democrats. Many U.S. voters support one candidate because they detest the other.

The Republicans will nominate the former President at next week’s Milwaukee convention. The process is not likely contentious, with the only variable being his running mate selection. The Democrat’s August 19-22 Chicago Convention is another story. As of July 8, it is unclear if President Biden will step aside in favor of his Vice-President Kamala Harris or if Democrats will select another candidate to face the former President in November. Meanwhile, the potential for significant protests, reminiscent of the 1968 Democratic Convention, is high. The bottom line is that the U.K. election has caused increased political certainty, while the U.S. election is causing unprecedented uncertainty, which can impact currency markets over the coming weeks and months.

The British pound-U.S. dollar currency pair has been in a sideways pattern since late 2022- Support and resistance levels

Since late 2022, the pound-U.S. dollar currency pair has traded in a narrow range.

The ten-year chart illustrates the currency pair’s $1.18034 to $1.31427 trading range since December 2022. The lows and highs reflect the current technical support and resistance levels.

Since 1983, the pound-dollar exchange rate (GBP:USD) has been as low as $1.03450 and as high as $2.1161. The pound was at the $1.2816 level on July 8. While the exchange rate is closer to the over four-decade low than the high, the shift toward political stability in the U.K. and U.S. uncertainty could favor an upside recovery in the pound over the coming weeks and months. A break above the $1.3150 level would be a bullish technical event.

FXB tracks the pound-U.S. dollar currency relationship

The most direct route for a risk position in the pound versus the U.S. dollar exchange rate is through the spot forex market or the futures arena. The fund profile for Invesco CurrencyShares® British Pound Sterling Trust ETF states:

At $123.29 per share, FXB had over $49 million in assets under management. FXB trades an average of 41,436 shares daily and charges a 0.40% management fee. Since the early July low, the pound-dollar currency pound moved 1.82% higher.

Over the same period, FXB moved 1.69% higher from $121.43 to $123.48 per share. One of FXB’s drawbacks is that it only trades during U.S. stock market hours, while the currency market operates around the clock. FXB can miss highs or lows when the stock market is not operating.

Elections have consequences, and political certainty in the U.K. could favor the pound over the dollar for the coming months, as uncertainty about the U.S. is at the highest level in decades. I expect the pound to continue to gain against the U.S. dollar, causing FXB to move to the upside.

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