Brexit fears stalk currency markets ahead of EU summit - by David Oakley, Elaine Moore and Roger Blitz

"To be or not to be"

Investors are betting that sterling is heading for another big tumble as currency markets are gripped by Brexit fears.

Net short positions on the pound have increased to the highest level since the summer of 2013, according to data from the US Commodity Futures Trading Commission.High quality global journalism requires investment.

With prime minister David Cameron expected to announce the date for the vote soon, possibly at the EU summit this week, some investors are predicting a rocky ride for sterling in the currency markets in the next few months.

The pound has fallen about 8 per cent since the middle of November on a trade weighted basis, with investors citing the uncertainty surrounding the Brexit vote, which could come as early as June, as one of the main reasons for the weakness in the currency.

“We need to be prepared for a choppy market,” said James Maltin, investment director at wealth manager Rathbones. “The Brexit debate may be about to heat up. It is yet another uncertainty out there that could hit the UK markets.”

Some analysts fear a potential Brexit could spark a recession, with Nomura, the Japanese bank, warning that the pound could fall 10 per cent to 15 per cent if overseas investors prove unwilling to finance Britain’s current account deficit.

Mark Carney, governor of the Bank of England, warned in January that concerns about Britain’s exit from the EU could test “the kindness of strangers” that the country relies on to fund its hefty current account deficit with the rest of the world.

Britain has a relatively large current account deficit of 3.7 per cent of gross domestic product. The worry is that overseas investors, which hold £427bn in UK government bonds, or a quarter of the market, might start to sell, putting further pressure on the pound.

Read more: Brexit fears stalk currency markets ahead of EU summit - FT.com

Britain: Why The ‘Poundzone’ Is As Sub-optimal A Currency Area As The Eurozone - Waltraud Schelkle

The great British public has at least one certainty: however bad the UK’s recent recession was, the Eurozone is doing worse. And not only UKIP supporters believe that this is the case: the consensus across the UK being that the euro is the joint currency of a motley assortment of countries that do not really fit together while there is enough similarity between the nations that make up the United Kingdom: England, Northern Ireland, Scotland and Wales. 

I have heard a former permanent secretary say on a panel at LSE earlier this year that there is just nothing that the UK economy can learn from the Eurozone but that the Eurozone in turn is probably doomed because it lacks ‘the glue’ that holds together the British currency union. There were a few Scottish visitors in the audience who couldn’t suppress an incredulous giggle.

But let’s concede that the Scots at least get the referendum that the Catalans would like to have and explore the economic case. As even general newspaper readers may know by now: “the Euro area is not an optimal currency area!” You get over 2,500 results if you put this phrase into Google and another 1,780 if you replace ‘optimal’ by ‘optimum’. Shock horror. But how worried should those poor creatures forced to use the euro – that is, the majority of continental Europeans – be about this verdict? Well, not more than the Brits who are forced to use the pound sterling.

Read more: Why The ‘Poundzone’ Is As Sub-optimal A Currency Area As The Eurozone