One of the biggest risk, both United Kingdom and Bank of England (BOE) facing is stagflation. Market participants have priced a much weaker Pound in the event of an exit and weaker Pound may lead to sharp rise in inflation. On the other hand, due to uncertainties over trade laws, slowdown in foreign direct investment (FDI) flow economy is likely to face recession, at least technically, according to BOE chief Mark Carney.

So what the central bank will respond to in the event of stagflation.

It is more likely that the bank will take actions in 2009 style but less aggressively.

Back then, BOE defied higher inflation in response to 2008/09 crisis and chose to execute growth boosting policies such as asset purchases and interest rate cuts. With interest rate already at 0.5%, bank is likely to go for further asset purchase, since it has more scope and just 25 basis points cut in lending rates.

BOE is unlikely to go for negative rates.

That will again be negative for Pound.

So in the event of exit, we feel Pound will suffer more than just the exit effect.

Pound is currently trading at 1.436 against Dollar.