Sterling could fall to parity with the euro in the event of a Brexit, analysts at UBS have warned on Monday (29 February) as they outlined the implications surrounding Britain's potential exit from the European Union.
According to economists at the Swiss investment bank, should the UK vote in favour of leaving the 28-country bloc at the 23 June referendum, the pound could fall to parity with the European currency from the current level of €1.269.
UBS, which put the chances of Brexit at 40%, said the pound could rebound back to levels of approximately 73p per euro seen last year but the debate over Britain's membership of the EU will eventually take its toll on UK markets.
"In our view, the largest part of the weakness in sterling since November can be attributed to increased concern over the possibility of exit from the EU," the bank's analysts said.
"In the near-term, we forecast euro/pound rising to 0.84 and pound/dollar falling to 1.36, reflecting the weighted probability of Remain/Leave scenarios. Our central view is that UK voters will ultimately elect to stay in the European Union and so, in our baseline scenario, we project euro/pound rebounding to 0.73 at the end of 2016 and settling to 0.75 at end of 2017."
On 24 February, HSBC warned Britain's economy could suffer a drop of 1.5% in 2016 and the pound could fall by up to 15% in the event of a Brexit, while earlier in February,Goldman Sachs voices similar concerns, indicating a drop in the sterling could in turn drive foreign investors away from Britain.
"The UK's current account deficit would still be a source of vulnerability despite some recent improvement," analysts at the US investment bank said. "An abrupt and total interruption to incoming capital flows in response to a Brexit could see sterling decline by as much as 15-20%."