After nearly four years since the British people voted in a referendum to leave the European Union (EU), Brexit finally became official on Friday, Jan. 31. Now that Britain has closed the door on its near half-century of EU membership, what happens next?
In a word – negotiations. Both parties have now entered into a transition period until the end of this year, in which time British and EU negotiators will attempt to iron out a free trade deal that covers everything from the manufacturing of goods to the provision of services. If Westminster and Brussels don't reach an agreement by Dec. 31, Britain could crash out of the bloc without a deal, resulting in possible tariffs and border disruption.
As volatile negotiations continue in the coming months, investors and traders should monitor these three U.K./EU-sensitive exchange-traded funds (ETFs). Let's review the metrics of each and work through several trading scenarios.
Invesco CurrencyShares British Pound Sterling Trust (FXB)
With net assets of almost $167 million, the Invesco CurrencyShares British Pound Sterling Trust (FXB) provides exposure to changes in the value of the British pound relative to the U.S. dollar. The fund, which rebalances quarterly, achieves its objective by holding British pounds in a JPMorgan Chase & Co. (JPM) depository account. A tight 0.02% spread and daily dollar volume of $6 million provide sufficient liquidity. FXB has an expense ratio of 0.4% and is trading down 1.18% so far this year as of Feb. 3, 2020.
The ETF's price broke out from a period of month-long consolidation Friday as the Brexit divorce became official. Those who buy here should set a profit target at $132.80, where price finds overhead resistance from the green horizontal line. Implement risk management by placing a stop-loss order below the 50-day simple moving average (SMA) and amending it to breakeven if the fund closes above the 52-week high at $129.57.
Invesco CurrencyShares Euro Currency Trust (FXE)
The Invesco CurrencyShares Euro Currency Trust (FXE) tracks the changes in the value of the euro relative to the U.S. dollar by holding physical euros in a JPMorgan deposit account. The use of this simple but effective strategy ensures that the fund virtually mirrors the EUR/USD exchange rate. FXE turns over about 80,000 shares per day on an average penny spread to provide a cost-effective instrument for those seeking euro exposure. As of Feb. 3, 2020, the ETF charges a 0.4% management fee, and the share price inched 1.69% lower last month.
Sellers have controlled price direction in FXE since early 2018. However, over the past five months, the $104 level has provided critical support. Furthermore, the relative strength index (RSI) has recently risen from oversold levels, indicating improving short-term sentiment. Currency traders who anticipate further euro strength in the coming months should look for a move up to $108 – an area where previous support may turn into resistance. Protect capital by setting a stop order under the September 2019 low at $103.86.
iShares MSCI Eurozone ETF (EZU)
Launched in 2000, the iShares MSCI Eurozone ETF (EZU) aims to track the performance of the MSCI EMU Index. The followed benchmark comprises developed European large- and mid-cap stocks that use the euro as their official currency. To achieve its objective, the fund invests its large $6.06 billion asset base in equities and depositary receipts that make up the index. Narrow spreads and trading volume of 3.6 million shares make the fund a popular choice in the segment. EZU charges an annual 0.49% management fee and has gained 13.19% over the past 12 months. Year to date, the ETF has slipped nearly 2% as of Feb. 3, 2020.
After a subdued start to the year, the EZU share price spent the second half of January giving back gains as coronavirus fears spread and the Brexit deadline loomed. Despite last month's pullback, the ETF remains in an uptrend and should find buyers near key support at $40. Those who buy at this level should set a take-profit order near the late January 2018 high at $44.38 but exit if the fund's price falls below the 200-day SMA.