With one day left before the UK’s EU referendum, the pound has backed away from its highest level since January. In fairness, Tuesday’s decline in the pound was modest at best, and GBP/USD is still six big figures higher than it was last week. The pound’s sharp rise in recent days could turn out to the best recovery in the FX market this year.
They think it’s all over…
While sterling may be basking in its reversal of fortune, it is worth remembering that the latest poll of polls has shown a dead heat, with support evenly split between those who want to leave the European Union and those who want to stay. There is one last EU referendum debate on TV this evening, after the performance of politicians’ from both sides during last night’s super debate at Wembley, it seems unlikely that this will significantly sway voters before polling day.
Although the Remain camp has managed to stem the recent wave of support for the Brexiteers, the outcome is still very much uncertain. There is no official exit poll due on Thursday night, however, rumour has it that some large hedge funds have organised their own unofficial exit polls, so expect lots of volatility throughout the night as we all try to cut through the fog of the vote count to find out who will emerge victorious.
Undecided voters will determine if Boris gets his “Independence Day”
The polls have consistently shown a large proportion of undecided voters. Tuesday night’s EU referendum debate was fairly neck and neck, and did little to change the direction of the campaign. For now, it is based on two arguments: immigration from the Leave camp and the risks to the economy from the Remain camp. Last minute campaigning may not be enough to sway the sizeable number of undecided voters. It is this cohort that makes the referendum so dangerous; no one really knows which way the UK electorate will vote.
Beware the bond market’s response to the referendum result
One point worth noting – the UK’s bond market could have a major reaction to the outcome of Thursday’s vote, and not in the way you might think. We believe that yields will rise in the UK if we vote to leave, as the market prices in a higher premium for our overseas borrowing. However, if the public votes to stay in the European Union then we may also see UK bond yields rise, and bond prices fall. Gilts have been attracting safe haven flows in the run-up to this referendum, so once voting risk has been removed we could see Gilt yields normalise and rise in the days after a win for the Remain camp. There are already signs of what may come, as the Remain camp has clawed back some vital support in the last few days, UK Gilt yields have increased by 20 basis points.
Janet Yellen plays second fiddle to EU referendum, for now
With the EU referendum on a knife-edge, the market is right to look elsewhere for direction. Some of this came from the Fed’s Janet Yellen, who gave a semi-annual testimony to Congress on Tuesday. She reinforced last week’s message from the Fed meeting that the Fed will slow the pace of rate hikes if the US economy posts another dismal jobs report for June. Once the EU referendum campaign is out of the way then the next NFP report is likely to come to the fore.
Overall, trading is likely to be sporadic and volumes thin in the next two sessions. This can be dangerous; if we get any rogue exit polls then any volatile moves could be magnified. For now, sterling remains in favour, however, pound traders are likely to be weighing up their post-referendum move while the market is quiet. After such a huge move this week, any bounce in sterling on the back of a win for the Remain camp could prove to be short-lived.
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