Europe Economy

UK Pound Faces Bigger Plunge: Analyst

Markets generally remain way too optimistic over the economic recovery, but the UK has the potential for the biggest disappointment with the pound set to slide as low as $1.31 by year end, "Squawk Box Europe" guest host Hans Redeker, global head of foreign exchange at BNP Paribas, said Tuesday.

Redeker has been one of the most bearish commentators on sterling for a while now, but said he fears the UK has the largest gap between optimism and reality within the developed economies.

"UK (gross domestic product) is still contracting at the fastest rate year-on-year basis of all the major economies, with some of the previous 'bright spots' in the economy that had helped to fuel this optimism also starting to lose their sparkle," he said. "The housing market is one such example."

The rapid pace of decline shown by sterling this year, equivalent to the slump in late 2008 when the crisis was at its peak, suggests the UK currency now exhibits traits similar to that of an emerging-market currency, he added.

But sterling weakness could create a sweet spot for UK big-cap companies, Morgan Stanley Equity Analyst Graham Secker said.

"The FTSE-100 is likely to outperform the S&P 500 if the US Dollar continues to appreciate against sterling," Secker said.

"Investors looking for a more simplistic way to position for a stronger US dollar should consider taking an overweight position in pharmaceuticals as the sector has a very strong correlation to movements in (pound vs. dollar)," he added.

Viewers of "Squawk Box Europe" also voiced concerns over the impact of a weak pound.

Glen failed to see the upside from a devalued currency:

"I can't see how the pound weakening is a good thing, we are net importers and the key is that we import all the things that we have to buy as opposed to want to buy. Look at the effect on food, gas, oil, etc. and it's easy to see that every drop in the pound acts like a tax on consumers, which means less spending in the economy leading to further weakness in economic activity and a downward spiral in the pound exacerbating the above."

Leslie also noted the inflationary effects of a weak currency:

"With most commodities priced in US dollar and the U.K. being a major importer this will make products more expensive by creating inflation and causing more problems for the economy. The interest rate tool to bring down inflation can also create more inflation through the back door. The impact of a weaker sterling will hit the population as food and other products will rise."