Sterling hits 10-week low as polls show majority favour Brexit

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By Anirban Nag and Patrick Graham

LONDON, June 16 (Reuters) - Sterling fell more than 1 percent to a 10-week low against the dollar on Thursday, after polls showed more Britons will vote to leave the European Union than stay next week and the Bank of England warned the pound may fall sharply in response.

With (Other OTC: WWTH - news) the tightly-fought campaign entering its final week polls for London's Evening Standard newspaper and retail brokers IG (LSE: IGG.L - news) .com gave 3 and 6 point leads to the leave camp ahead of next Thursday's vote. Bookmakers now put the odds of a decision that would send a shockwave through global financial markets at around 37 percent.

The pound fell 1.3 percent to $1.4015, its lowest since early April, while it was flat against the euro at 79.30 pence . It (Other OTC: ITGL - news) slid 3 percent against the safe-haven yen on Thursday to hit its lowest in more than three years.

Sterling has suffered since the end of last year from a steady pricing in of risks from a Brexit - seen largely related to shocks to growth and the financing of Britain's huge current account deficit. It has fallen 7 percent this year against the euro and against a trade-weighted basket of currencies since the start of the year.

The BoE's Monetary Policy Committee waded back into the debate after a regular meeting, saying it was "increasingly likely" that sterling would fall further after a vote to leave the EU, and perhaps sharply.

"Specific references to both assets and currencies exemplify the severity of the situation, with "recent behaviour" of sterling being noted - a clear warning of what the market already knows, but hearing it from the higher authorities just reinstates the importance of next week's vote," said Alex Lydall (NYSE: LDL - news) , senior sales trader at Foenix Partners.

THIN VOLUMES

Traders say volumes have fallen and many investors are trying to close out some of the net $6 billion in bets placed on a weaker pound, judging they cannot be exposed to the risk of an instantaneous 5-10 percent jump in after a Remain vote.

A jump in UK retail sales for June underlined that the British economy was in better shape than many of its European counterparts, but Brexit risks dominated sentiment. Data on Wednesday also showed unemployment falling to 5.0 percent in April and wages up by 2 percent in annual terms or more.

Hedge funds and asset managers have sought to protect their exposure to UK markets through derivatives but hedging costs at record highs are becoming prohibitive.

Most traders are bracing for sharp swings in the coming week, with sterling likely to move in sync with betting odds.

"The tight relationship between changes in betting odds and the exchange rate offers an attractive way to compute the impact on the exchange rate of the referendum outcome. It indicates sterling/dollar could well move to $1.30 given a "Leave" vote or $1.50 if "Remain" wins," said Richard Falkenhall, senior currency analyst at SEB (LSE: 0MGS.L - news) , a leading Nordic bank. (Editing by Ruth Pitchford)