Pound Drops Below $1.40 for First Time Since 2009 Amid 'Brexit' Concerns

  • Sterling dropping most in seven years as EU vote looms
  • BOE governor likens impact on sterling to Scottish referendum

‘Brexit’ and Risks to the Pound

The pound fell to the lowest level in almost seven years after Bank of England policy makers said uncertainty over Britain’s membership of the European Union is weighing on the currency.

Sterling has tumbled since London Mayor Boris Johnson, one of the nation’s most popular politicians, said Sunday he’ll campaign for the U.K. to leave the EU in a June referendum. Sterling’s 2.7 percent plunge in the first two days of this week was the biggest since February 2009 in the teeth of the global financial crisis.

BOE officials including Governor Mark Carney said Tuesday the weaker pound could offset the U.K.’s other economic frailties and help boost inflation. The policy chief added that the central bank wasn’t making any judgment on the outcome of the EU vote, which could lead to the nation quitting the political and economic bloc -- a so-called “Brexit.”

QuickTake Brexit

“‘Brexit’ is certainly weighing on the pound,” said Daniel Brehon, a foreign-exchange strategist at Deutsche Bank AG in London. “But, structural concerns such as the current-account deficit were already a problem beforehand. Long-term the depreciation may help boost inflation but pass-through has been underwhelming so far.”

Deutsche Bank is bearish on the pound and forecasts a drop to $1.28 by year-end, Brehon said.

The pound fell 0.2 percent to $1.3994 as of 9:09 a.m. Tokyo time Wednesday, after touching $1.3986, the lowest since March 2009. It was at 78.78 pence per euro after sliding 1.7 percent over Monday and Tuesday.

The prospect of Britain leaving the world’s largest single market is adding to the losses caused by traders pushing back bets on the timing of a BOE interest-rate increase. Together, these factors have helped push the pound lower against all of its Group-of-10 peers this year.

It’s “increasingly clear” that the moves in the pound and in options insuring against a future drop in sterling “have spiked to levels” similar to those seen in the Scottish referendum campaign of 2014, Carney told U.K. lawmakers.

The pound “has under-performed ahead of U.K. political events in the past,” Commonwealth Bank of Australia strategists including London-based Peter Dragicevich wrote in a note. “The upcoming referendum will be no different.”

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