GBP: 10-15% devaluation in a Brexit scenario – Nomura

By FXStreet If the UK votes to leave the EU on 23 June (a roughly 25% probability in our view), the uncertainty about the UK’s future would build in a risk premium that would require sterling assets to cheapen up in order to be attractive enough to external investors for the current account deficit to be financed.

Key Quotes:

“This is the reason we expect a 10-15% devaluation of the trade-weighted currency in a Brexit scenario. Differences of opinion here are mainly on order of magnitude rather than direction.

This devaluation would import inflation, adding 2-3% to the consumer price level, in our view, which would not be dissimilar to what the BoE’s model would suggest. Michael Saunders’ view was that this inflation shock would have high persistence, leading to rate hikes.

This implicitly requires a de-anchoring of inflation expectations, with the MPC also believing that to be the case.”
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Source:: FX Street