• Sterling could fall at least 10% if U.K. votes to leave EU
  • Millennium's base case is for U.K. to remain in trading bloc

Investors should position for the pound to fall against the dollar as its recent recovery suggests the market is underpricing the risk of Britain voting to leave the European Union next month, according to foreign-exchange asset manager Millennium Global Investments.

Sterling may slide at least 10 percent if the leave campaign wins, while any rebound in case of a decision to remain is likely to be small, said Lisa Scott-Smith, co-head of portfolio management at the company, which oversees $16 billion. The pound posted its first back-to-back monthly gain versus the dollar since 2013 in April, a move that suggests investors see a lower risk of the U.K. leaving the economic bloc. Still, it’s the worst-performing Group-of-10 currency this year.

“If my central case, a remain vote, is correct, we might see a 2-3 percent relief rebound which I see as an opportunity to sell into, and the ceiling would probably be around $1.50,” said London-based Scott-Smith. “Most expectations in terms of adjustment for Vote Leave is around 10 percent, but you could not rule out something larger knowing that Britain needs foreign capital.”

Seven-Year Low

The U.K. currency has been a barometer of sentiment throughout the referendum debate, sliding to a seven-year low versus the dollar about a week after the date of the vote was announced, and now rallying on signs that the “remain” camp is gaining traction. The recent move higher points to renewed optimism that a Brexit will be avoided, and suggests traders may be reassessing whether they went too hard in betting against sterling.

The pound was little changed at $1.4482 as of 3:04 p.m. London time. It dropped to $1.3836 on Feb. 29, the lowest since March 2009. Sterling strengthened 0.6 percent to 78.75 pence per euro, having touched 79.47 pence Wednesday, the weakest since April 18.

The EU referendum aside, Scott-Smith still sees the pound as a sell, given the economic divergence between the U.S. and the U.K.

“Some evidence suggested that the recent weakness in the U.K. economy is more than just a delayed intention to do business because of Brexit worries,” said Scott-Smith. “In the U.S., we don’t even have one rate hike priced in for the Fed by the end of the year. That is very light given the positive economic backdrop and what we heard from policy makers.”

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