Investing.com -- GBP/USD fell to fresh seven-year lows on Wednesday, extending a massive three-day rout, as top lawmakers continued to debate the merits of a historic referendum that could enable the UK to leave the European Union in June.
The currency pair traded between 1.3879 and 1.4017 in Wednesday's session, before settling at 1.3922, down 0.0099 or 0.71% on the session. Since UK prime minister David Cameron reached an agreement with European Commission leaders on Friday that granted Britain special status in the European bloc, the pound has plummeted more than 3% against the dollar. The pound encountered further downward pressure on Wednesday after a Bloomberg survey determined that sterling could drop as low as 1.35 versus the greenback within a week of Britain's departure, a level last seen in 1985.
On Wednesday, International Monetary Fund head Christine Lagarde warned that the steady growth achieved by the nation could be threatened in the months leading up to the June 23 vote. It came as HSBC cautioned that a potential Brexit could cause the pound to drop another 20%, creating a sharp rise in imports and spiraling inflation, which could force the Bank of England to raise interest rates.
A yes vote in the referendum could also lead to heightened risks of contagion throughout the euro zone if other top nations decide to follow suit and demand special considerations from the EU. Many top economists believe that a mass departure could severely cripple the euro.
“My hunch is that it is bound to be a negative on all fronts," Lagarde told CNN. "For those that stay, because there are fewer of them, and for those who go, because they lose the benefit of facilitation of exchange."
“Uncertainty is bad in and of itself. No economic player likes uncertainty. They don’t invest, they don’t hire, they don’t make decisions in times of uncertainty," Lagarde added.
The euro fell mildly by 0.04% against the dollar on Wednesday to close at 1.1016, the lowest closing level for the month. The euro has closed lower against its American counterpart in three consecutive sessions and eight of the last nine. EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.
The dollar retreated from three-week highs reached in the European afternoon session, following the release of disappointing economic data in the U.S. The U.S. Commerce Department said Wednesday that new home sales plummeted 9.2% to a seasonally-adjusted 494,000, sharply below expectations for a 4.4% decline to 520,000. Sales in the West, a critical region for the new housing market, plunged 32% on the month. For the year, new home sales in the West, South and Midwest regions of the U.S. have fallen into negative territory. Separately, the Purchasing Managers Index (PMI) Services' Flash tumbled to 49.8 in February, dropping to its lowest level since October, 2013. Analysts expected the reading to stay flat at 53.7.
Investors await a busy day of economic headlines on Friday when the second estimate of fourth quarter GDP and Personal Income and Outlays for January are released. The Core PCE Index, the Federal Reserve's preferred gauge for inflation, is expected to increase by 0.2% from December's total. Following the release, a trio of Fed policymakers, San Francisco Fed president John Williams and Fed governors Jerome Powell and Lael Brainard, are scheduled to deliver speeches on monetary policy and the economy.
On Tuesday evening, Fed governor Stanley Fischer said that members of the Federal Open Market Committee are still uncertain on whether they will raise short-term interest rates at their next meeting in three weeks. While Fischer said the FOMC could discuss the prospects of implementing a negative interest rate policy, he indicated that it is unlikely that the U.S. central bank will push rates into sub-zero territory.
Any rate hikes by the Fed this year are viewed as bullish for the dollar as foreign investors pile into the greenback in order to capitalize on higher yields.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, reached an intraday high of 97.92 on Wednesday morning, before closing at 97.51, up 0.03% on the session. Since moving to a 12-month high in late-November, the index has fallen roughly 2%.