Declines in the pound sterling could accelerate as political instability in the euro zone increases, potentially hurting the British currency more than the euro, Nomura said in a note on Monday.
"The euro tends to depreciate much less against the pound when the popularity of the anti-establishment parties rises," Nomura said, noting the effects are usually seen against the dollar and the Swiss franc. "This means pound depreciation against the U.S. dollar could accelerate when political instability in the key euro area nations increases."
Nomura pointed to three main euro-centric forces as likely to weigh on the pound ahead: U.K. external deficit financing was set to become more difficult, the British economy could lose momentum and the possibility that EU governments would pursue a "hard Brexit" could become more likely.
Political ructions at home have already taken a bite from the pound.
The U.K.'s June 23 vote to exit the European Union (EU) sent the currency into a nosedive, with sterling falling from as high as $1.5018 before the results to as low as $1.1450 last month. At 3:48 p.m. HK/SIN, the pound was fetching $1.2469.
Several important votes are coming up on the continent, with the emerging possibility that voters in more countries will upend established political norms to express anti-union sentiment.
On December 4, Italy will hold a referendum on reforming its constitution to restructure the legislative process to speed the passage of laws.
A defeat in the referendum for Italy would be perceived as a victory for anti-European sentiment and could lead to social turmoil in other countries that are already facing a strong resistance to changes, with elections across Europe that will take place next year.
The first key factor set to weigh on sterling was that euro-area investors were losing their appetite for U.K. assets, Nomura said.