Sterling outlook darkens as UK referendum looms

The odds are stacking up against sterling for 2016.

With growth slowing and the potential for a referendum on Britain’s future in the EU as soon as June, options traders are the most bearish on the UK currency in more than six months.

The currency has undershot analysts’ forecasts by the most since 2010 this year, while predictions for the end of 2016 haven’t been lower since the week of the general election in May.

After the Federal Reserve increased interest rates for the first time in almost a decade this month, the risk is that concern about the EU vote will leave the Bank of England lagging further behind its US peer, weighing on sterling’s outlook.

In the past 20 years, the BoE has tended to follow its US counterpart with a lag of about three months, according to economists at Deutsche Bank.

But markets currently aren’t pricing in a full rate increase until the first quarter of 2017.

Britain leaving the EU “is a lose-lose” situation that “could delay any hike from the BoE,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale.

Sterling yesterday was little changed at $1.4871 in London time, after dropping to $1.4806 on December 22, the weakest since April 15.

SocGen predicts sterling will drop to $1.41 by the end of September, a level not seen since 2009. The median forecast of economists is for the currency to end that month at $1.52.