HSBC, Deutsche Bank 33 cents apart on pound's 2016 outlook

Europe's biggest banks are laying out drastically different paths for the pound.

As sterling dropped this week to $1.4080 - the weakest level since 2009 - Europe's largest lender HSBC said the UK currency will climb to $1.60 by year-end. Meanwhile, the world's second-biggest currency trader Deutsche Bank reiterated its bearish outlook, which calls for a decline to $1.27.

The disparity coincides with the UK facing a slew of challenges, from whipsawing financial markets around the globe and a vote on whether to remain a European Union member, to inflation that's close to zero, damping the outlook for interest rates. While Bank of England Governor Mark Carney on January 19 signaled that a boost to UK rates is still some way off, HSBC says the market has become too pessimistic.

"We continue to expect a rate rise sooner than the market expects and that continues to support a view of sterling higher," said Daragh Maher, head of US currency strategy for HSBC in New York. "Ultimately we will be driven by Brexit and rate expectations in the UK. But for now, the fixation is other factors" such as falling oil prices and stocks.

The pound rose 0.4 per cent in the week to $1.4308, halting a three-week run of declines that was the longest since July. It slid as low as $1.4080 on January 21, the lowest since March 2009. Sterling gained 1.3 per cent to 75.56 pence per euro.