LONDON: Month-end rebalancing flows helped sterling recover modestly against the dollar on Monday, though the currency stayed close to a seven-year low on worries about a possible British exit from the European Union.
The pound had earlier in the day fallen to as low as $1.3836 , its weakest since March 2009. On a trade-weighted basis, it was on track for its worst month since the height of the financial crisis in 2008.
Sterling was trading up 1 percent against a broadly weaker euro on Monday, at around 78 pence, having hit a 14-month low of 79.28 pence last week.
Swiss bank UBS said sterling could be dragged down to parity with the euro if Britain votes to leave the 28-nation EU in a June 23 referendum, to which the bank assigns a 40 percent chance.
If voters opt to stay, however, the pound should bounce to 73 pence per euro, UBS said, meaning a vote to leave would carry a price of more than 25 percent.
Citi strategists wrote in a research note that sterling could be given some breathing space this week after a brutal sell-off. “However, with short positioning not yet stretched, investors may sell into any rally," they said.
The pound put in its worst performance in over seven years against the dollar last week, shedding more than 3.5 percent, but data from the Commodity Futures Trading Commission showed speculators reduced their net bets for a weaker British pound to their lowest in six weeks in the week to last Tuesday.
Sterling has been hit by worries that a “Brexit" would threaten the huge foreign investment flows Britain needs to balance its current account deficit, one of the biggest in the developed world at around 4 percent of output.
The pound has also been undermined by expectations that an exit would push back the horizon for a Bank of England interest rate rise.
HSBC, Britain's biggest bank, has said growth could be up to 1.5 percentage points lower next year if Britain voted to leave the EU.
The British government said on Monday a Brexit could lead to 10 years or more of damaging uncertainty while a new relationship with both the EU and other countries is negotiated.
British government bond yields fell sharply, broadly in line with German Bund yields, which hit a 10-month low after data showed deflation returned to the euro zone this month. The 10-year gilt yield fell around 5 basis points on the day to 1.345 percent.
Data showed net gilt purchases by foreign investors fell in January by the most since March 2014. But UBS's head of UK rates strategy, John Wraith, said he thought the move was probably a “straw in the wind" rather than a sell-off driven by worries about a Brexit.
“I would want to see at least two, if not three or four, months consecutively of selling in bigger sizes than that if I was to ascribe to it a dynamic specifically related to a Brexit," Wraith said.