Soros Says 'Brexit' Will Hurt the British Pound, but Will It?

Perhaps realizing that yesterday's rally was overdone, European investors took a breather Tuesday morning, two days before the "Brexit" referendum, in which a vote for the U.K. to remain in the European Union is by no means assured.

Despite recent jitters, markets have not really priced in the possibility of a pro-Brexit vote. The polls show the vote is too close to call, and some of the biggest newspapers in the U.K., such as tabloid The Sun and broadsheet The Telegraph, are urging their readers to vote "Leave."

It is difficult to know what the reaction will be to a vote pro-Brexit, but various analysts and the media have tried to look at some of the consequences, and there is one thing they seem to all agree on: a currency crisis could be the most likely negative consequence.

The latest to warn that the pound would depreciate sharply is none other than George Soros. He would know. He famously made around $1 billion in 1992, when he bet against the Bank of England's ability to keep the pound in the European Exchange Rate Mechanism, or ERM, and won.

Now, Soros warned in the pro-E.U. newspaper the Guardian that "the only winners will be speculators" if the vote is pro-Brexit.

"Too many believe that a vote to leave the E.U. will have no effect on their personal financial position. This is wishful thinking. It would have at least one very clear and immediate effect that will touch every household: the value of the pound would decline precipitously," Soros wrote in an article.

With brutal sincerity, he went on: "I would expect this devaluation to be bigger and more disruptive than the 15% devaluation that occurred in September 1992, when I was fortunate enough to make a substantial profit for my hedge fund investors, at the expense of the Bank of England and the British government."

Unlike in those times, when the devaluation was in fact positive for the economy and the Bank of England cut interest rates to help the U.K. weather economic weakness, this time the weapon of lower interest rates is out of ammunition and there is nothing the central bank can do to help, which will mean a devaluation would be very negative, Soros argued.

He estimated that the pound might fall to under $1.15 from its current level around $1.47.

"If sterling fell to this level, then ironically one pound would be worth about one euro -- a method of 'joining the euro' that nobody in Britain would want," he wrote.

While Soros has a great reputation and track record, not all his calls have turned out to have been prescient.

How worried should investors be this time?

It is of course difficult to gauge how much the pound will move if the vote leans toward exit, but it is clear that sterling has been the most sensitive gauge of investors' moves. Analysts at Capital Economics, a think-tank that leans toward a pro-Brexit position, have predicted that the pound could fall to as low as $1.20 -- not far from Soros' prediction.

Adam Slater, lead economist at the Oxford Economics think tank, has estimated that a 1% change in the probability of a Brexit has moved the pound's effective exchange rate (the pound's relative strength vs. a basket of other currencies) by 0.17%

According to Slater, recent moves in the currency imply that the pound trade-weighted index could drop by a further 9%, which would translate into an exchange rate vs. the U.S. dollar of $1.29 -- meaning a drop of a little over 12% from its current level vs. the greenback