Sterling to drop again, Validus Risk Management forecasts

Sterling is likely to fall to about $1.35 in the run-up to Britain’s referendum on European Union membership, according to the currency’s top forecaster.

Validus Risk Management, which led Bloomberg’s first-quarter rankings for predicting the sterling-dollar rate, foresees a slide to as low as $1.20 if the UK votes to leave the world’s largest single market on June 23.

Sterling touched $1.3503 in 2009 but hasn’t been as low as $1.35 since the days of Margaret Thatcher in the 1980s.

The pound fell for a second day against the dollar yesterday and touched the weakest level versus the euro since June 2014.

Britain’s currency dropped 0.5% to $1.4087 at one stage in London trading yesterday, extending its decline this year to 4.4%.

It weakened 0.3% to 80.61 pence per euro, after sliding to 80.68 pence.

Last November, sterling was trading as high as 69 pence against the weakened euro.

As the Brexit vote gets closer, sterling has since fallen sharply — by over 15% — against the euro.

That means Irish firms have since lost a huge price advantage when exporting goods and services into Britain.

On a trade-weighted basis, the UK currency is now at its lowest level in more than two years.

Concern leaving the EU would damage the UK economy has pushed gauges of anticipated sterling volatility to the highest since 2010. They are now above levels seen before last year’s UK general election and the 2014 vote on Scottish independence.

“Sterling has room to decline from here heading into the June vote,” said Kevin Lester, London-based director at Validus, a risk-advisory firm.

The pound “could fall to $1.20 in the event of a Brexit in June but that could be only the starting point for further weakness.

“We favour a more tactical approach using various options structures as the risk-reward trade-off is unfavorable in the spot market,” Mr Lester said.

Mr Lester recommends options structures longer than a three-month tenor, which would capture the potential decline in the pound after the referendum.

Longer-maturity derivatives could offer a better risk premium, he said.

Even if the UK votes to remain in the EU, investors should enter new positions that bet on the pound’s decline, because the Bank of England still won’t raise interest rates because of the economic headwinds facing the UK, according to Mr Lester.

Bloomberg and Irish Examiner staff


We take a trip down memory lane and check out what happened on this day in years gone by by looking back at some Irish Examiner front pages and highlighting other events which went down in history across the world.August 20, 2019: A look back at what happened on this day in years gone by

More From The Irish Examiner