Brexit fears keep sterling down

Brexit fears keep sterling down

The UK currency remained below $1.40 this morning (February 26) against the US dollar following a torrid week.

The slump in sterling has been fuelled by fears the UK could vote to leave the EU, dubbed ‘Brexit’, on June 23.

Jaco Rouw, global fixed income investment manager at NN Investment Partners, said the pound had already weakened 4-7 per cent due to the risk of Brexit and warned it could fall further.

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He said: “It is not easy to assess how much the weakness of GBP is due to Brexit risk. Correlations with the US dollar and the euro have destabilised and it is not straightforward how cyclical developments, such as disappointing UK economic data and a more dovish stance by the Bank of England, can be disentangled from Brexit risk. But it seems fair to say that GBP is around 4-7 per cent weaker because of it.”

“But Brexit risk only seems to have been priced in to an extent, as the referendum outcome is hard to predict. Brexit would probably be a major shock, having large repercussions on both the UK and the eurozone,” he added.

In an analyst note yesterday (February 25) Chris Beauchamp, market analyst at IG Group, suggested an absence of news about a possible Brexit might help the pound recover against the US dollar.

“However, it will take a recovery of $1.40 to confirm a more extended leg higher is underway,” he said. “Nonetheless, with Brexit talk still all the rage, the risk is that we get sudden moves lower, in which case we look to $1.3866 and then $1.3803 as potential support.”