LONDON (Reuters) - HSBC said on Friday it forecast the pound to drop to $1.10 and parity against the euro by the end of 2017 as fears of a “hard” Brexit intensify.
“Brexit, whether one likes it or not, is a political decision, one we have to respect,” David Bloom, global head of FX research said in a note. “The currency is now the de facto official opposition to the government’s policies.”
“The argument which is still presented to us - that the UK and EU will resolve their difference and come to an amicable deal - appears a little surreal. It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation. A lose-lose situation is the inevitable outcome.”
The bank expects the currency to drop to $1.20 by the end of this year from around $1.2432 on Friday.
Sterling dived about 10 percent at the start of Asian trade on Friday, sinking from levels around $1.2600 to $1.1378 in a matter of seconds, before recovering to trade 1.4 percent lower on the day.
“The pound used to be a relatively simple currency that used to trade on cyclical events and data, but now it has become a political and structural currency. This is a recipe for weakness given its twin deficits,” Bloom added.
Reporting by Anirban Nag and Patrick Graham