Britain heads to the polls for crucial EU referendum, Sterling volatility higher than during the financial crisis
23/Jun/2016 • Currency Updates•
Polls officially opened in the UK this morning for Britain’s historic in-out referendum on EU membership, with the outcome of the vote still firmly in the balance.
The polls will close at 22:00 UK time tonight, with the final results from all 399 counting regions to begin trickling through overnight. Sunderland is expected to report first at around 00:30 on Friday, with the rest to be gradually released right through until the official announcement at approximately 7:00.
Unlike the General Election, there will be no official exit polls, however, unofficial polls have been commissioned and will be released at 22:00 this evening. A sizable lead for either side in excess of around 5% could give us an early idea as to the outcome, although this is far from guaranteed given the closeness of the vote.
In the likely event of a ‘remain’ result, which the market and betting companies are now placing at around a 75% probability, we would expect a bounce in the Pound and, to a lesser extent, the Euro. Based on our estimations, we would expect a rally in Sterling of roughly 3-4% against the US Dollar. Conversely, we think a Brexit could cause a very sharp and immediate depreciation in the Pound of anything between 10-15% from current levels, although it is worth noting the uncertainty is enormous.
The participation rate could prove vital, with a high participation among voters today likely to support the status quo given ‘remain’ supporters tend to be somewhat less passionate.
Ahead of today’s vote Sterling firmed yesterday and overnight, rallying to a six month high against the US Dollar as support continues to drift back in favour of the vote to ‘remain’. Short Sterling positions have been significantly reduced this week following the death of pro-EU MP Jo Cox last week, which many have cited as a contributing factor in the shift in sentiment toward the ‘remain’ camp.
Regardless of the outcome, we expect volatility in the major currencies to be high and many businesses are covering their exposure today in order to avoid potential adverse currency movements.
Major currencies in detail:
Sterling strengthened 0.8% on Wednesday ahead of today’s referendum.
The latest opinion poll from Opinium yesterday showed a very marginal lead for the ‘leave’ vote at 45% to 44%. Investors will be looking to a poll released by YouGov at around 22:00 this evening. While not a physical exit poll, it could cause an immediate move in the Pound should investors choose to trust its reliability.
In a good gauge of what’s in store today, one week implied volatility in Sterling rose back up to around 40% on Wednesday, while overnight volatility surged to a record high. Both measures remain well above any level obtained during the entirety of the financial crisis.
The Euro strengthening 0.7% versus the Dollar in line with the Pound yesterday, as support drifted in favour of the ‘remain’ vote.
Given the significant economic links between the Eurozone and the UK, today’s referendum is undoubtedly a sizable event risk for the Euro as well as Sterling.
In the past few weeks the single currency has moved around 20% as much as the Pound in reaction to opinion polls. Should a ‘remain’ result prevail we would therefore anticipate a move in the Euro of roughly one-fifth of that in Sterling, around 1%, with an approximate 2% decline should the UK vote out.
Unsurprisingly the referendum will dominate trading today. The latest PMI’s this morning will therefore likely be overlooked.
The US Dollar fell 0.4% against its major peers on Wednesday, with traders in a fairly cautious mood ahead of today’s referendum.
Janet Yellen continued her testimony in front of Congress yesterday, although added little new information following her comments on Tuesday. Head of the IMF Christine Lagarde voiced support for the Fed’s gradual approach to interest rate hikes yesterday while calming remote concerns that a Brexit could cause a recession in the US.
Jobless claims and the latest manufacturing PMI from Markit could shift the US Dollar today, although attention will be fixed on events in the UK.
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