Pound's Top Forecaster Sees Drop to $1.35 Before EU Vote

  • Validus says sterling may fall to $1.20 if `Brexit' happened
  • Trade-weighted pound at lowest in more than two years

‘Brexit’ Offering Opportunities for Investors

The pound is likely to fall to about $1.35 in the run-up to Britain’s referendum on European Union membership, according to the currency’s top forecaster.

Validus Risk Management Ltd., which led Bloomberg’s first-quarter rankings for predicting the sterling-dollar rate, foresees a slide to as low as $1.20 if the U.K. votes to leave the world’s largest single market on June 23. The pound fell for a second day versus the dollar on Wednesday and slid to the weakest level against the euro since June 2014.

Britain’s currency touched $1.3503 in 2009 but hasn’t been as low as $1.35 since the 1980s. Concern leaving the EU would damage the U.K. economy has pushed gauges of anticipated sterling volatility to the highest since 2010 -- and above levels seen before last year’s general election and the 2014 vote on Scottish independence.

“Sterling has room to decline from here heading into the June vote,” said Kevin Lester, London-based director at Validus, a risk-advisory firm. The pound “could fall to $1.20 in the event of a ‘Brexit’ in June but that could be only the starting point for further weakness. We favor a more tactical approach using various options structures as the risk-reward trade-off is unfavorable in the spot market.”

Longer Structures

The pound dropped 0.2 percent to $1.4134 as of 4:38 p.m. London time, leaving its decline this year at 4 percent. It weakened 0.4 percent to 80.68 pence per euro, after sliding to 81.05, and on a trade-weighted basis fell to its lowest in more than two years.

Lester recommends options structures longer than a three-month tenor, which would capture the potential decline in the pound after the referendum. Longer-maturity derivatives could offer a better risk premium, he said.

Even if the U.K. votes to remain in the EU, investors should enter new positions that bet on the pound’s decline because economic headwinds will prevent the Bank of England from raising interest rates, according to Lester.

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