Pound Rallies End Quickly as Risk of Brexit Seen Creeping Higher

  • Pound may drop to $1.30 if U.K. votes for Brexit: UniCredit
  • Citi ‘increasingly concerned’ as EU vote outcome tough to call

Rallies in the pound are proving tough to sustain as recent opinion polls puncture investor confidence that the U.K. will choose to remain in the European Union in the June 23 referendum.

Sterling was little changed versus the dollar, after two days of declines that coincided with the release of surveys signaling the ‘Leave’ camp pulling ahead of the ‘Remain’ side. Leaving the bloc would run counter to forecasts at Citigroup Inc., the world’s biggest currency trader, whose analysts said they were “increasingly concerned” as poll results became closer and erratic. The pound has only once rallied for more than three successive days since early March.

Sterling fell the most in 10 weeks on May 31 and one-month volatility jumped to a seven-year high the next day. At UniCredit SpA, which was the most bullish of its peers on the pound versus the dollar in September, global head of currency strategy Vasileios Gkionakis predicted sterling may plunge to levels last seen three decades ago under a Brexit scenario, with Britain choosing to exit the bloc.

“Given all that is at stake, we are certainly concerned,” London-based Gkionakis said in an interview with Bloomberg Radio. “I think this is largely reflected in both the implied volatility in sterling, which has surged” and the that fact that the currency “seems to have lost its ability to rally” against the dollar and the euro as investors remain “largely cautious.”

Pound at $1.30?

While his central scenario is that the U.K. will stay within the EU, Gkionakis said in the event of a break-up the pound may “easily” trade back to $1.30 and weaken to 90 pence to the euro.

The pound was at $1.4434 as of 4:30 p.m. London time, having erased most of its 0.4 percent increase from earlier. It declined 1.5 percent over the previous two days. Sterling strengthened 0.4 percent on Thursday to 77.29 pence per euro, and earlier touched 77.76, its weakest since May 18.

A gauge of sterling’s one-month volatility versus the dollar was at 20.5 percent, having touched 21.1 percent on Wednesday, which was the highest since 2009.

European Central Bank President Mario Draghi on Thursday mentioned the U.K. referendum as one of the downside risks affecting developments in the global economy. At a press conference in Vienna, Draghi said that Britain’s presence in the European Union is mutually “beneficial.”

Recent polls signaling a swing in favor of Brexit is “rattling markets that had grown complacent about the long-standing, if slight advantage, for ‘Remain’,” analysts at Citi, led by Tina Fordham, wrote in a client note. “We continue to maintain a 30 to 40 percent probability of Brexit, but are increasingly concerned about the implications of continued closeness in the polls, erratic polling results” and growing political turmoil in the U.K.

Before it's here, it's on the Bloomberg Terminal.