Sterling has been the best performer over the last month as it was the only currency to outperform the US dollar over that time. With betting odds now approaching 80% for a ‘remain’ vote, we have seen some evidence of GBP shorts being covered. We continue to argue that telephone opinion polls, which consistently point toward leads for the ‘remain’ camp of around 8-10% are likely to be more accurate than internet polls that invariably overstate support for an exit.
Thus, unless we see a substantive narrowing in the polls, expect markets to become more confident of the result, unwinding GBP negativity in the process. However, the flip-side of opinion poll differentials remaining outside the margin for error could be the level of turnout. The greatest risk for the ‘remain’ campaign is likely voter apathy, strong supporters of ‘Brexit’ are likely to vote, while younger people, who predominantly favour to remain in the EU are less likely to vote.
The recent BoE Quarterly Inflation Report detailed that around half of the slide in trade-weighted sterling could be attributable to ‘Brexit’-related uncertainty. The implication is that the removal of such fears should encourage sterling to recover by a commensurate amount. Moreover, it’s possible that the economy will register a post-referendum recovery. Beyond the June 23rd vote, delayed investment and spending decisions will be reversed, (on the basis of ‘remain’ winning) in the process encouraging the economy to regain lost momentum. However, MPC dove Vlieghe is not convinced that the rebound will lead to tighter monetary policy. Even hawkish member Forbes has suggested that not all of the current slowdown is ‘Brexit’ related. Together, that suggests being wary of extrapolating too much from the recent GBP gains ahead of the vote.
(Source: CIBC, eFXplus)
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Copyright © 2016 CIBC, eFXnews™Original Article
