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Sterling to Tumble If UK Is Downgraded: HSBC

A downgrade next year for the struggling U.K. economy could put the British pound under severe pressure, the head of foreign exchange strategy at HSBC has warned.

Doug Armand | Photographer's Choice | Getty Images

According to David Bloom, sterling, as the British pound is known, would be particularly vulnerable if perceived risk in Europe and the U.S. stabilizes in the next few months. He said that could happen if the European Central Bank starts its bond-buying program and the U.S. "fiscal cliff" fears are kicked into the long grass.

"What I'm really worried about next year is that the U.K. will look the ugliest out of the three ugly sisters," he told CNBC Wednesday. "We've got a situation where maybe the U.K. gets downgraded, the economy is looking 'pants'....and that will put sterling under massive pressure."

In September, the ECB announced the Outright Monetary Transactions (OMT) plan to buy the sovereign bonds of stricken euro zone members if they applied for aid and agreed to strict conditions for economic reforms.

Bloom explained that unlike in the U.S., bond buying in Europe is positive for the currency as it decreases the risk of default, and a boost for the euro would make the pound relatively unattractive.

"You get some sort of semblance of stability through the euro zone," he said. "And if at that stage the U.K. economy comes under pressure, that's when we worry about sterling."

The U.K. enjoyed a brief respite from a contraction in gross domestic product (GDP) in recent months, but the country's independent forecasting body now expects a further dip in the fourth quarter, leading to fears of a triple-dip recession.

(Read More: Triple-Dip Recession, AAA Loss Loom for UK)

Finance Minister George Osborne has stuck to his plan for austerity announcing a "fiscally neutral" budget update on December 5. But credit ratings agency Fitch has warned that the U.K.'s triple-A rating is at risk with concerns it will miss its debt reduction target.

"The plan is falling apart that we've been promised and the markets believed in," Bloom said. "Unfortunately I've been waiting for this recovery for five years and I'm getting a little bored, it just hasn't happened."

Euro Strength

Bloom expects the euro to reach a level of 1.40 against the dollar by the end of 2013. This view is shared by Klaudius Sobczyk, managing director of Advanced Dynamic Asset Management who sees continued weakness in the Japanese yen and the dollar.

"We need a stronger euro to balance that out and that's going to work into 1.35, 1.40 later next year," he told CNBC Wednesday. "It will depend on American policies and obviously it's not the euro strength, it's rather the dollar weakness."

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