Brexit uncertainty sees sterling stumble again

By Jemima Kelly

LONDON, April 6 (Reuters) - Sterling stumbled again on Wednesday, staying close to the previous day's 1-1/2-year low against the euro on mounting worries over the economic risks posed by a June referendum to decide whether Britain leaves, or stays in, the European Union.

News (Other OTC: NWSAL - news) last week that Britain's current account deficit had soared to 7 percent of national output in the final quarter of last year threw a focus on how exposed Britain would be should foreign investors and buyers of its bonds be spooked by a Brexit from the EU following the June 23 poll.

The latest opinion polls show the "In" and "Out" campaigns neck-and-neck, while bookmakers' odds point to a roughly 33 percent chance that Britons will vote to leave.

Business research provider IHS (NYSE: IHS - news) said on Wednesday it was assigning a 35 to 40 percent chance of a Brexit, with the impact on the British economy determined by "how amicable, constructive and successful the UK's negotiations were with the EU".

Though bookies' odds have not shifted much over the past month, analysts say the closer the vote gets, the more the pound will be vulnerable to Brexit uncertainty.

Sterling slipped 0.4 percent on Wednesday to a two-week low of $1.4094. Against the euro, it inched down 0.1 percent to 80.46 pence, back towards Tuesday's 1-1/2-year trough of 80.535 pence.

"Last week we saw that the adjustment to the downside for the pound in the event of Brexit may need to be even bigger, given that the current account deficit in the UK was even larger than many people had feared," said Bank of Tokyo-Mitsubishi UFJ currency strategist Lee Hardman.

"The UK is increasingly reliant on external financing and it's a big risk if we add a Brexit to the mix, because the UK will find it more difficult to finance that deficit," he said.

Implied volatility on three-month sterling/dollar options, covering the period of the referendum, have jumped to well above 15 percent, the highest level since May 2010.

On a trade-weighted basis sterling is at levels last seen in late 2013.

Analysts said subdued risk sentiment across global markets was another factor keeping the pound under pressure.

"(Sterling is) sensitive to the risk backdrop, and this could drive modest underperformance should weak sentiment persist," said Citi currency strategist Josh O'Byrne. (Editing by Richard Balmforth)