Pound’s Decline Deepens as Currency Reclaims Dubious Honorby and
Sterling falls to the lowest level since October on Tuesday
HSBC sees drop to more than three-decade low of $1.10
Just 10 days into the new year, the pound has already established a firm grip on its 2016 position as the worst-performing Group-of-10 currency.
Sterling dropped to the lowest level versus the dollar since October on Tuesday amid concern the U.K. is heading for a exit from the European Union that prioritizes curbing immigration over single-market membership. That’s left analysts braced for another volatile 12 months, with HSBC Holdings Plc strategists predicting that the pound may drop to as low as $1.10 if the most severe exit option is pursued.
“Currencies are now the main bellwether of political events,” HSBC strategists David Bloom, Daragh Maher and Dominic Bunning, wrote in a note to clients. “A political view can give us a currency forecast. But just as importantly, the currency can also tell us where we are on the political scale of hard to soft.”
The pound has fallen 1.6 percent against the U.S. currency this year, more than any of its G-10 peers, and adding to a 16 percent drop in 2016. While, before the referendum, sterling was seen as one of the market’s best ways to trade the risk of a ‘leave’ vote, since then it has swung wildly amid debates over the manner of the U.K.’s exit.
That’s led HSBC analysts to dub the currency a “Brexometer” to help judge “the market’s current estimate of the hardness or softness of Brexit.” The gauge uses the $1.55 to $1.10 range as a scale from zero to 100, where zero equates to where the currency would trade if Brexit were never to happen, and 100 is a “diamond-hard” Brexit. The measure currently stands at about 74 which is “just beyond the border line of a hard Brexit,” while HSBC predicts a drop to the lower end of the range by the end of this year.
The pound fell 0.1 percent to $1.2152 as of 12:52 p.m. in London, after earlier touching $1.2108, the lowest since October. A drop to $1.10 would take the currency to the weakest since 1985.
For a look at the pound’s technical outlook, click here.
Theresa May’s weekend comments that leaving the EU will be about “getting the right relationship, not about keeping bits of membership,” helped pushed sterling lower this week, and the government’s communication strategy is likely to trigger more volatility, according Vasileios Gkionakis, global head of foreign-exchange strategy at UniCredit SpA.
“I am pretty confident we are going to see quite a sharp increase in volatility over the next few weeks,” he said in a Bloomberg TV interview with Anna Edwards and Manus Cranny on Tuesday. This is “largely because the signals I am getting from the government are confusing and to a certain extent sometimes they contradict themselves. When the market sees that there is no consistent view, the market tends to bid volatility higher.”