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Here’s Why the British Pound Is Crashing Against the Dollar

February 24, 2016

Pound Seen Tumbling Whether U.K. Stays In EU Or Seeks 'Brexit'Pound Seen Tumbling Whether U.K. Stays In EU Or Seeks 'Brexit'
The tumbling Pound.Photograph by Bloomberg via Getty Images

The British pound traded near $1.39 for the first time in seven years on Wednesday, while the cost of hedging against sharp swings jumped to their highest in more than four years as concerns that Britons could leave the European Union deepened.

The latest poll showed the “in” camp is ahead in a referendum to be held in June but the gap has narrowed. Support for staying in stood at 51%, while 39% wanted a so-called “Brexit” and 10% were undecided, according to the ComRes poll for the Daily Mail.

Sterling fell to $1.3925 with chartists now targeting the low of $1.35 seen in 2009. The currency has come under attack since the start of the week, shedding 3% after several senior members of the ruling Conservative Party threw their weight behind the campaign to leave the European Union over the weekend.

The euro was 0.3% higher at 78.82 pence although the single currency has been held back on worries that the euro zone itself could face a period of uncertainty if Britain chose to leave the Union.

“The growing anxiety over the pending EU referendum vote and the uncertain impact it may have on the UK economy have triggered an aggressive selloff in sterling,” said Lukman Otunuga, analyst at FXTM.

The uncertainty has pushed back chances of an interest rate hike by the Bank of England. Instead, BoE Governor Mark Carney reminded investors that the BoE could still use rate cuts and a broadening of a bond-buying program to boost Britain’s economy if needed.

HSBC, a big trader in sterling, said the currency could lose up to 15% of its value and UK economic growth could be up to 1.5 percentage points lower next year if Britons vote to leave the European Union in the referendum.

“A vote for Brexit would have potentially huge consequences for all asset classes. Following a vote to leave we think uncertainty could grip the UK economy, triggering a potential slowdown in growth and a collapse in sterling,” HSBC analysts wrote in a note.

Those concerns saw the six-month implied sterling/dollar volatility, options that cover the June referendum, hit 13.35% on Wednesday as investors sought protection against further big falls in the pound. That was its highest since September 2011.

The increased demand to hedge has also seen options contracts indicating the largest bias towards sterling weakness over the next six months since at least the parliamentary elections of 2010.