The pound has gapped higher at the start of this week’s trading session after the latest EU referendum opinion poll suggested a loss of support for the Leave camp. Campaigning re-started on Sunday, however there was a more subdued tone after last week’s tragic events in Yorkshire. The pause in the campaign seems to have lent crucial support to team Remain, with only four days to go until the vote.
The markets have always been more comfortable with the UK remaining in the European Union, hence the boost to risk sentiment now that the Remain camp’s campaign appears to be back on track. However, a week is a long time in politics. The final opinion poll on Tuesday will be eagerly awaited, if it fails to back up what we have seen in today’s poll for the Observer then the pound could quickly turn south once again.
It’s neck and neck once more
The Observer poll showed the UK is split down the middle, with 44% of respondents stating that they would vote to remain, and 44% stating that they would vote to leave. 10% of voters said that they were undecided. Interestingly, the poll was conducted between Tuesday and Friday last week, with 80% of the responses gathered before the murder of MP Jo Cox last Thursday. There have been suggestions that the Remain camp could get a boost post the death of Jo Cox, who was an ardent Remain campaigner. Thus, the market will be on the lookout for team Remain to retake the lead before Thursday’s vote. In reality though, the polls are likely to show a very tight race with a large number of voters undecided, which could make for a volatile few hours on Thursday night as we wait for the results.
The pound shines as the polls start to favour Remain
The market appears to be pricing in a resurgence of support for the Remain camp. The pound is approx. 2% higher against the major currencies, including the USD, JPY and EUR. We expect that the boost to the pound will have a domino effect on other risky assets on Monday, and we could see large gains for global equity markets in the coming hours.
Result night could induce another wave of market panic
Tonight’s action in the financial markets looks like the Remain camp has the result in the bag; however, financial markets are prone to get carried away with an idea. Remain campaigners still have a huge amount of work to do to secure victory on Thursday night. Traders’ nerves are likely to be fraught as we wait for the results, not least because we won’t get an exit poll to give us guidance on which way the result has gone. Instead we have to wait for 382 declarations from around the UK, the first will be Sunderland at midnight, the last one will be sometime on Friday morning. At this stage, the best case is that the formal result will be announced between 7-8am on Friday morning, but if there have been any problems at the counts then the result could be delayed, which could lead to some wild swings in asset prices on Friday. Compounding the problem is the lack of precedent for this type of referendum, so it will be difficult to tell how each side is doing until the final result is announced.
Looking ahead, the key driver of the markets will be the final opinion poll by Ipsos Mori released on Tuesday, two days before the vote. If this shows that the Remain camp has managed to recoup its lead then pound gains could be solidified later this week. However, we expect sentiment to sour as we reach voting day. The long wait for the results on Thursday night and Friday morning is likely to trigger some wild swings in market sentiment as traders desperately try to figure out if we have voted to stay in or leave the EU. Traders may be in a calmer mood at the start of this week, but referendum volatility is unlikely to have peaked.