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Is sterling dancing on a knife edge?

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Andrew Linscott | iStock | Getty Images Plus

The ongoing uncertainty about the results of the EU referendum is seen to be impacting both sterling and the U.K. economy. Sterling volatility currently is higher than at the time of the Scottish referendum debate and that highlights the uncertainty that the markets are concerned about, a strategist at BNP Paribas told CNBC.

"The market is nervous about what the future holds so if we know with a strong degree of certainty what the future holds then I think the sterling will do pretty well," Steven Saywell, Global Head of FX Strategy at BNP Paribas said.

He explained that the market is very short sterling and there are two ways of looking at it. "First, it is the largest short out in the G10 currencies and it is the largest sterling short since 2008."

This in turn has pushed sterling to very undervalued levels, both against the euro and the dollar, he explained. "Easy way of looking at this is currently euro/sterling is trading around 79, close to 80. What our fair value models are telling us is that it should be around 70. So that's a huge undervaluation of sterling. If we see a reduction in the uncertainty then the suggestion we would make at BNP Paribas is that sterling could actually rally."


Meanwhile, a report from Britain's National Institute of Economic and Social Research has said sterling is likely to see a 20 percent slide in the immediate aftermath of a British vote to leave to the EU. "The weaker pound would also lead to higher import prices, feeding through into higher prices faced by households." The report also forecasts the UK economy to be 1 percent smaller in 2017 than if it stayed in and 2.3 percent smaller by 2018.

Concerns over Brexit started to gain momentum after two polls last week showed the 'Leave EU' campaign leading. With a little over a month to the Brexit vote, a number of polls have been pointing to the 'Leave' camp leading the way, although by a small figure. The latest weekly ICM Survey shows the 'Leave' camp leading by two points over 'Remain' ignoring warnings from the U.S. President Barack Obama and Japanese Prime Minister Shinzo Abe in recent days. This has led to concern among businesses based in the U.K. for long term planning.

In an interview with CNBC, Credit Suisse CEO Tidjane Thiam said there is a bit of uncertainty linked to referendum. He said it is harder to see a material impact on business results since the risk is more in the longer term.

"If you have a big transaction to make six to nine months down the road then it is not surprising that you might hesitate in making decisions."


While a number of corporates have been silent over the issue of Brexit, many others have come out and expressed their stance very clearly. Stephen Hester, CEO of RSA Insurance Group told CNBC that his company will benefit from the U.K. being a part of the EU.

"Insurers, as a group, hold a very large part of the U.K.'s savings and one of the things that is clear is if there was an exit from the EU, the value of U.K. assets goes down. And that's not good for insurers, it's not good for all the people who have their savings with insurers, so that's why RSA believes that we're better off, from a business perspective, from an economic perspective, in the European Union."

The pro Brexit campaigners continue to argue that just about 6 percent of U.K. businesses actually trade with the EU and a far greater majority of them are small and medium-sized enterprises who don't have to worry about the consequences of a Brexit. Hester warns that the economy could see a trickledown effect.

"The lesson of the world for tens of thousands of years is: you come together to achieve more. And it seems to me whenever societies, whether economically or in any other way, wall themselves off, there's trouble. It could be religious trouble, it could be racial, it could be political, could be economic -- walling yourself off in the world is not a recipe for success."

U.K. economists that are in the 'Leave' camp have warned the risk of an economic slowdown if the country was to leave the EU. Official trade figures this morning show Britain's trade deficit with other EU countries is running at record high level. Data from the Office for National Statistics show the gap between exports and imports in the UK in the first three months of 2016 widened by £0.7 billion to £23.9 billion, its biggest since the early days of the financial crisis. This has raised further concerns of the risks faced by the UK economy if an exit were to happen.

RSA's Hester says that while the UK is strong enough to survive outside the UK, it will definitely be poorer by an amount which is hard to judge.

"And so the issue will be: are they good reasons to deliberately want to be poorer?"

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