Here’s what could wipe 20% off sterling: HSBC

How much lower could the pound go?
How much lower could the pound go?

Separating from the European Union could trigger a 20 percent drop in sterling and shave 1.5 percentage points off the British economy, HSBC has warned.

The doom-laden report released Wednesday outlined the worst-case scenario if voters were to approve a "Brexit" — that is, a British exit from the EU — in the June 23 referendum.

It's the bank's latest piece of analysis to be released since U.K Prime Minister David Cameron promised to hold a general vote on the country's membership of the EU on June 23.

"It will be a momentous decision," HSBC's note explained. "A vote for Brexit would have potentially huge consequences for all asset classes...Uncertainty could grip the UK economy, triggering a potential slowdown in growth and a collapse in sterling," it added.

British Prime Minister David Cameron arrives an EU summit meeting on the so-called Brexit at the European Union headquarters in Brussels, on February 19, 2016
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The currency market has only priced in a 33 percent probability of a Brexit, HSBC explained. But if voters opted to leave, the move could trigger a further 15 to 20 percent drop against the U.S. dollar, sending the pound to levels not seen since the early 1980s, and moving sterling towards parity with euro.

A Brexit could also raise concerns about the country's "twin deficits" — across government finances and a current account balance — prompting capital outflows as investors start to re-think their U.K. investments.

While a weaker pound would make U.K. exports cheaper, the other effect is that imported goods and services would be much more expensive. This could eventually raise inflation by 5 percentage points, HSBC warned, eroding real incomes and trimming household spending.

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However, Toby Thompson, a fund manager at Brooks Macdonald Funds, suggested that Brexit's impact on financial markets like a weaker pound could ultimately ease currency headwinds for U.K. companies.

"We have been suffering from a currency level that is stronger than is really justified," he told CNBC on Wednesday.

HSBC explained that while currency depreciation would theoretically boost trade by lowering the price of U.K. exports, sterling weakness in this case would have been driven by fears over future trade with the EU — despite lower prices.

The EU notably accounted for over more than 44 percent of UK exports in 2014, according to the Office for National Statistics.

Business leaders warn 'Brexit' puts jobs at risk

Another hot topic of the Brexit debate has been migration. If the U.K. were to shut its doors to migrant labor from the broader EU, HSBC predicted that the resultant labor shortages, combined with inflation, could shave up to 1.5 percentage points off economic growth in 2017.

Earlier this week, 200 business leaders — including 36 from the U.K.'s top 100 listed firms — signed a letter urging voters to stay in the 28-nation bloc, saying thousands of jobs and economic prospects would be at risk.

The cable trade was already tracking lower Wednesday afternoon after Cameron formally announced the referendum date after marathon reform talks with EU leaders over the weekend. The pound was last seen near 1.38 against the U.S. dollar, marking a 2.65 drop for the week and a 5.7 fall since January 1.

But regardless of whether the U.K. ultimately leaves the EU, HSBC said they expect Britain to remain "a flexible and dynamic economy," that would have opportunities to adapt to new economic circumstances.

"The unknown is how economically destructive and drawn out the transition phase would be," the note said.

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