Concerns over Britain’s place within the EU continued to weigh on sterling, dragging the pound further below $1.39 for the first time since 2009, a level rarely seen and associated with previous crises for the currency.
The sustained decline added to sterling’s status as the year’s worst performing major currency against the dollar and came as analysts produced deeper insights into the potential economic consequences of the UK’s potential exit from the 28-nation bloc.
The pound dropped as much as 0.9 per cent to an intraday low of $1.3896 on Wednesday — the first time the currency has traded below $1.40 for seven years.
The $1.40 level has long been seen as a de facto floor for sterling, and one it has rarely traded under for an extended period since the mid-1980s.
Meanwhile, six-month implied volatility on sterling against the dollar — a measure of the cost of protection traders are taking out against shifts in the exchange rate — crossed above 13 per cent for the first time since 2011. The length of the sixth-month contract runs past the date of the referendum.
The euro continued to strengthen against the pound, by 0.4 per cent to £0.7888, setting the shared currency on course for its third straight day of gains. But it too has been undermined by the prospect of the departure from the EU of a major member state. Against the dollar, the shared currency fell a further 0.2 per cent to $1.0998.
Analysts were adding more detail to their consideration of the potential economic consequences of “Brexit” — the UK’s departure from the bloc after the June 23 vote — adding to the sense of unease.
HSBC said the “uncertainty” that would “grip the economy” could “take around 1.0-1.5 percentage points off the GDP growth rate by the second half of 2017”.
The bank continued: “This would push our 2017 growth forecast, currently 2.3 per cent, into the 0.8 per cent to 1.3 per cent range. And if sterling were to fall by around 15 per cent to 20 per cent, as our currency strategists predict, UK inflation could rise by up to 5 percentage points. In the event of a vote for Brexit, concerns about deflation could swiftly give way to worries of stagflation.”
The pound’s rough ride looked set to continue.
Simon Derrick, chief market strategist at BNY Mellon, said: “Our measure of volatility over the past month for sterling against the euro stands at almost exactly the same levels that it stood at on the day the UK exited the exchange rate mechanism [in 1992] and on the day the UK announced the banking bailout in October 2008.”
He pointed out that sterling has made big swings during previous crises: “During its collapse in 1981 and then again in both 1992 and 2008, the currency managed to lose 25 per cent or more over a six-month period. Even more minor moves (1975, 1975, 1976, 1989, 1991, 2010) saw declines in the region of 15 per cent over a period of half a year.”
The pound has faced sustained pressure throughout the week, as concern about the outcome of the referendum followed the decision of London mayor Boris Johnson and Michael Gove, the justice secretary, to support the Out campaign, lifting its political profile.
The perceived increase to the chances of Brexit led to a 1.8 per cent fall for the pound against the dollar on Monday, its biggest one-day drop since May 2010. It is down more than 2.9 per cent over the week to date and over 5.7 per cent in 2016.
Meanwhile, analysts also warned continued pressure could come from the UK’s reliance on foreign investors to support its large current account deficit, which sits at 5 per cent of national income.
Addressing parliament on Tuesday, Mark Carney, governor of the Bank of England, said the central bank was treating the Brexit referendum as it would any other political event — “which is not to make judgment on the outcome and assume the status quo continues”.
Market watchers are starting to consider possible contagion effects, with the EU and the euro at risk of wider fragmentation should Britain vote to depart.
“The euro is no longer proving to be a beneficiary of safe-haven flows/unwinding of euro-funded ‘carry trades’, with the prospect of UK Brexit seen to be an almost equally bad news story for the EU,” noted Ray Attrill, National Australia Bank global co-head of foreign exchange strategy.
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