Brexit Could Punish Sterling ETF

The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB), which tracks the movement of the British pound against the U.S. dollar, has lost 3.5% over the past two weeks as Brexit (Great Britain’s potential departure from the European Union), speculation has intensified.

Britain will vote on a June 23 referendum to determine if the country will remain with the union. Earier this week, sterling dipped to a seven-year low against the U.S. dollar, with FXB, already one of this year’s worst-performing currency ETFs, falling to an all-time low.

Now, some economists are forecasting dire outcomes for sterling should Great Britain vote in favor of departing the European Union.

“A British exit from the European Union would be so devastating for the pound that 29 out of 34 economists in a Bloomberg survey see it sinking to $1.35 or below within a week of a vote to leave — levels last seen in 1985,” reports Bloomberg. “Twenty-three of the economists say sterling wouldn’t recover from that rate within three months of the June 23 referendum. Seven see the U.K. currency falling below $1.20 immediately after a “Brexit” vote. And just one sees it above $1.40. That’s stronger than its low on Wednesday, when the pound fell through $1.39 for the first time since 2009.”

By leaving the union, the UK would need to negotiate a new trade agreement with the EU that would preserve some of the trade benefits of EU membership. Consequently, without the union, UK exporters would be pressure. David Page, an economist at AXA Investment Managers, on Financial Times argues that a Brexit could cause significant adverse impact on economic activity, with gross domestic product to be 2% to 7% lower.