HSBC, Europe's largest lender, on Thursday raised its year-end sterling forecast by 10 US cents to $1.60, on the basis that Britain will vote to stay in the European Union and spark a strong rally in the currency. That would mark a 14 percent increase from where sterling is currently trading, at around $1.41, and would take it back to levels not seen since mid-2014.
The London-based bank said that political concerns surrounding the referendum on Britain's membership of Europe - due by 2017 but widely expected to come at some point this year - were weighing on sterling sooner than they had expected them to. "The UK will need to get beyond 'Brexit' fears before sterling can strengthen, but once it does, the rally is set to be sizeable," the bank's currency strategists wrote in a research note. The bank reckons strong domestic demand will force the Bank of England to raise interest rates much sooner than markets expect - investors are currently betting that rates will stay at their record lows until 2017. That should also boost the pound.