BofA Cuts Pound View as Deutsche AM Sees Sword of Damocles

  • BofA says sterling likely to break $1.40 on 'Brexit' concern
  • Pound posts biggest one-day gain since December versus dollar

The specter of a potential exit from the European Union is disrupting analysts’ view of the pound’s future.

The vote is a “sword of Damocles” hanging over the pound and deterring investors, according to the chief currency strategist at Deutsche Asset & Wealth Management Investment GmbH, which oversees about $1.3 trillion. Even Bank of America Merrill Lynch, which says the risks of an EU exit are exaggerated, notes the currency has already started to price in a “Brexit” premium, and is likely to break through $1.40 against the dollar.

“I don’t see any willingness by short- or medium-term investors to touch sterling for the time being," Deutsche Asset & Wealth Management’s Dirk Aufderheide said from Frankfurt. The impact of a “Brexit risk” will persist for at least “another couple of months,” he said.

The two companies are the latest to warn about the perils of Britain quitting the EU, the world’s biggest single market. Sterling has weakened against 11 of its 16 major peers in 2016, touching an almost seven-year low versus the dollar last week, amid speculation a planned referendum on the U.K.’s future may be held as soon as June. The currency has also been hurt by a deteriorating global economy, near-zero domestic inflation and the waning prospect of an interest-rate increase by the Bank of England, which would be its first since 2007.

Sterling’s Rally

The pound rallied on Tuesday, paring its recent losses. It jumped 0.7 percent to $1.4341 as of 4:40 p.m. London time, its biggest gain of the year. That still leaves it down almost 3 percent since the start of 2016 after it slid to $1.4080 on Jan. 21, the lowest since March 2009.

While there’s “some scope for recovery” in the next few days as the pound approaches technical resistance levels, the general course will be downward, Deutsche Asset & Wealth Management’s Aufderheide said. “There’s hardly any incentive to touch this falling knife.”

Sterling also advanced against Europe’s shared currency Tuesday, climbing 0.6 percent to 75.68 pence per euro. It touched a one-year low of 77.56 pence on Jan. 20.

“We have revised down our near-term GBP forecast profile on the assumption that the referendum is increasingly likely to be held this year,” Bank of America analysts led by Kamal Sharma, a senior G-10 currency strategist, wrote in a note on Tuesday. “GBP/USD is likely to break below long-term support at 1.40 whilst EUR/GBP is likely to head back towards 0.80.”

Even so, the chances of Britain quitting the EU are exaggerated, according to the analysts, who argued that opinion polls are underestimating support for an “in” vote.

“The removal of Brexit uncertainty should see a meaningful rebound in GBP sentiment,” the Bank of America analysts wrote.

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