Goldman warns of sterling slide on Brexit

“The UK’s current account deficit would still be a source of vulnerability despite some recent improvement.

“An abrupt and total interruption to incoming capital flows in response to a ‘Brexit’ could see sterling decline by as much as 15-20 per cent,” the US investment bank said in a client note.

That would be on a trade-weighted basis, implying a potential fall in sterling against the dollar to around $1.15-1.20 from $1.4565 currently and a rise in the euro to around 90-95 pence from 76 pence, it said.

Britain’s current account deficit has narrowed over the past year or so to 3.7 per cent of gross domestic product from around 6 per cent.

Since November, however, the currency has fallen 5 per cent as expectations that the Bank of England will raise interest rates this year have faded. Indeed, the prospect of a cut is back on the table, according to latest money market pricing.

The emergence of Brexit - Britain leaving the European Union - to the forefront of public debate may also have contributed to that weakness.

“Some signs of a ‘Brexit’ risk premium are appearing,” Goldman said, noting that sterling’s recent slide has been greater than interest rate differentials against the dollar and particularly the euro would imply.

Goldman expects Britain to remain in the EU and that the underlying dynamics of the UK economy will remain “solid”.