The scale of the reaction on sterling, a 2% fall to a seven-year low against the dollar, driven chiefly by the defection of London mayor Boris Johnson to the ‘out’ camp over the weekend, also sent UK government bond prices lower.
Sterling hit a seven-year low of $1.4057 and fell 1.5% against the euro to 78.03 pence.
Ratings agency Moody’s said it would consider shifting the outlook on Britain’s credit rating to negative while analysts from the world’s biggest currency trader, US bank Citi, told clients the chances of Britons voting to leave the EU had risen to between 30% and 40%.
Bookmakers have also raised the odds to 33% from 29% before prime minister David Cameron sealed a deal on Friday with which to fight the June 23 vote.
Beyond the currency, the impact on business, banking, and policy of a four-month run-in to the June 23 vote looks more nuanced.
Some banks have raised the prospect of the Bank of England cutting record-low interest rates further to offset any damage to economic growth in the short-term.
That might weaken the pound but could further inflate the value of other assets including stocks seen as well-insulated against the negatives of a Brexit.
“Until now, the Brexit side has lacked the backing of one of the heavyweight figures in UK politics,” Citi’s chief UK economist Michael Saunders wrote.
“That has now changed with the backing of [justice secretary Michael] Gove and, in particular, Johnson.”
The cost of hedging against falls in the exchange rate shot up to its highest in more than four years and the Bank of England’s trade-weighted measure of the pound’s value hit a 15-month low.
Concerns over Britain’s possible departure from the EU have been at the heart of a decline in sterling since November, and several financials are now talking up the chances of a slide to as little as $1.30.
“We’ve not seen many Brexit trades being put on [today] but our corporate desk is seeing more hedging being put on by corporates who have sterling exposure,” Morgan Stanley analyst Jacob Nell said.
Mr Nell, who expects the pound to fall to $1.30 by the end of 2016 in the event of a Brexit, said he would be watching for signs of how active Mr Johnson plans to be in campaigning in the months ahead.
Opinion polls and further turbulence around migration or terrorist attacks on cities in Europe may also shift sentiment, he said.
US bank JP Morgan recommended buying British exporters against domestically focussed companies and blue chip stocks over smaller-cap stocks.
“In the event of the UK leaving, the initial knee-jerk impact on the market could be quite negative,” it said.
“But we believe the resulting weakness of sterling and the BoE action will cushion a chunk of the fall in equities.”
Banking stocks were broadly higher, resisting the prospect that they would be hurt by any threat to their operations in London.
“We expect UK markets to be volatile over coming days as the campaigns step up a gear, but our central case remains that the UK population will decide to remain in the EU,” UBS said.