Sterling could decline further against the euro to offset the economic impact of losing trade links with the European Union, the president of the Peterson Institute told CNBC on Tuesday.
"The pound has moved a lot against the dollar, less than half as much against the euro. But U.K. trade remains as twice as much with the euro area as it does with the dollar," Adam Posen, president of the Peterson Institute for International Economics noted.
"If you want to cope with the terms of trade shock, Brexit is whatever other fantasies you have, it's a negative trade shock vis-à-vis the EU and if you want to close some of these trade deficits, the pound has to decline more against the euro," the former member of the Bank of England said.
On the eve of the U.K. government beginning the official process of leaving the European Union, sterling moved slightly higher against the dollar to trade at $1.2557 – mainly driven by a weaker dollar. The euro moved to 0.8642 pence on Tuesday morning.
Most traders are betting sterling will decline in the coming months as Brexit negotiations take place. Both Bank of America Merrill Lynch and Nomura have recently said they are short on the currency. This is because there are several unresolved issues regarding the exit process, raising the chances that the U.K. might leave the EU without any agreement.
"It's going to be painful," Posen said about Brexit. He added however that "it's arthritis, not death."
According to a Reuters poll, most traders expect sterling at $1.23 in one month and at $1.21 in three months.