Ahead of the new week we find no convincing shift in favour of either Remain or Leave with regards to the all-important EU referendum however one major forecaster has given us their view on where the GBP vs EUR exchange rate could reach on the event of a Leave vote.
Pound sterling was hit hard in the dying spasms of Friday trade when an ORB International poll, conducted for the Independent, reported a 10 point lead for the Leave campaign who enjoy 55% of the vote compared to Stay’s 45%.
Worryingly for the Remain camp, ORB found that 78% of Leave supporters say they will definitely vote – describing themselves as a “10” on a scale of 0-10, while only 66% of Remain supporters say the same.
However, subsequent polls have suggested the ORB International findings may be a little extreme.
According to an Opinium poll for Sunday's Observer newspaper, the Remain camp now stand at 44% compared to 42% for Leave.
This is a swing back to Remain as the pervious week’s poll showed Brexit to be in the lead a stabilisation that will be welcomed by the Remain camp which has endured two weeks of negative polling.
The British pound will likely find a kinder market reaction to the result when Asian markets open on Sunday night UK time.
According to a YouGov poll for The Sunday Times Leave stands at 43% and Remain at 42%.
The outcome is looking incredibly tight at this stage presenting the pound sterling with the kind of uncertainty it hates.
Nevertheless, there could be a 'wait and see' tone to markets at the start of the new week but the bias is certainly to the downside.
With regards to GBP/EUR note that there is good buying support located at 1.2626 and a good number of analysts we follow suggest this could halt declines.
Where Will the Pound Trade Against the Euro on In or Out Vote?
Pound Sterling Live have reported that sterling has more to gain against the euro than against the US dollar on the event of a Remain vote.
We can report today that Danske Bank have told clients ahead of the new week in FX that “there is a substantial digital risk in particular in EUR/GBP and UK equities.”
The range for GBP/EUR is 1.3158 in 3M in case of a Bremain, which is Danske's official FX forecast, and 1.11 in case of a Brexit. As such, the risks are heavily skewed towards a weaker GBP into the UK’s EU referendum.
“We also want to stress our asymmetric market views, which we believe will hold both in case of a Brexit and a Bremain,” says the note.
This should highlight to readers where the balance of risks lie with regards to any GBP/EUR international payments they may have.
Dyson Gives a Boost to Leave
We hear that well respected UK industrialist Sir James Dyson has come out in support of the Leave campaign.
“When the Remain campaign tells us no one will trade with us if we leave the EU, sorry, it’s absolute cobblers. Our trade imbalance with Europe is running at nine billion a month and rising. If this trend continues, that is £100bn a year,” says Dyson in an interview with The Telegraph.
Dyson adds, “if, as David Cameron suggested, they imposed a tariff of 10 per cent on us, we will do the same in return. We buy more from Europe than they buy from us, so we would be the net beneficiary and based on these numbers it would bring £10bn into the UK annually. Added to our net EU contribution, it would make us around £18.5bn better off each year if we left the EU,” he concludes with quiet triumph.
We see Dyson’s position as something of a coup for the Leave camp which has struggled to win the economic argument.
Global Markets and Risk Sentiment Undermine Sterling
The British pound is one of those assets you would not want to own for the duration of the next two weeks. With the EU referendum seeing to it that GBP is a financial pariah, it is easy to see why it would be shunned when investors are feeling nervous.
The previous week saw stock markets close in a sea of red with notable declines being recorded from Asia to America, via Europe.
In such an environment investors will naturally shun the British pound, even if it has been a surprisingly quiet day on the EU referendum front.
“Markets have come full circle this week, with the gains seen in the early part of the week giving way to substantial losses towards the end. It is particularly notable that whilst European indices have seen substantial losses, the US markets are have managed to claw back some early losses, highlighting proximity of the link between todays selling and the fear of a Brexit,” says Joshua Mahony, Market Analyst at IG in London.
Of interest is that the German DAX is over 2.3% lower, the pound vs euro rate has a history of tracking big moves in the DAX and today is no exception.
German bund yields have plummeted notably with the 10-year German Bund yield hitting a record low of 0.027% which, “combined with Britain’s record drop, shows just how fragile major markets all over the world currently are,” notes Dennis de Jong, MD at UFX.com.
When investors run scared they tend to favour the safety of German bunds.
“There’s a huge amount of uncertainty with the UK’s EU referendum less than two weeks away and continued concerns about the Chinese economy and the Fed’s interest rate plans in the US. Investors are sitting tight, while inflation figures suggest consumers are following suit,” notes de Jong.
I have scoured my sources to find a reason for the declines. Unfortunately there is no one definitive source on which we can pin the blame.
“Well, from a bad start to a worse lunchtime to a truly awful afternoon the global markets lost the plot this Friday, with the European indices plunging into the red in a way reminiscent of the grim scenes back in February,” says Connor Campbell, an analyst with Spreadex.
Mike van Dulken, Head of Research at Accendo Markets, says the declines are derived from Asian bourses following their stateside peers south as negative bond yields become more prevalent, calling into question global monetary stimulus efforts while growth and inflation struggle to recover post-crisis.
“And with event-risk related to next week's Fed policy update and a too-close-to-call UK referendum on EU membership the week after, investors are continuing to temper their appetite for risk assets into the week-end. Apprehension likely stems from what bearing China data (Industrial Production, Retail Sales, Investment) will have on sentiment come Monday morning as well as a US dollar bounce hurting the commodity space, taking oil from its 2016 recovery highs,” says van Dulken.
Fed to Drive FX Direction Over Coming Days
Brexit aside, markets will be watching the US Federal Reserve in the coming week to figure out whether the Fed is looking to raise interest rates anytime soon.
The outcome will impact direction in the world’s largest currency, therefore influencing major pairs like GBP/USD and EUR/USD through to the price of commodities and movements in stock markets.
This is key for sterling as we have noticed of late that the UK currency appears increasingly sensitive to the mood of global investors.
“The focus for markets will be on the message the FOMC sends about its future intentions, and in particular whether there are any strong hints of a policy tightening at either of the next two policy meetings in July and September,” says Rhys Herbert at Lloyds Bank’s Commercial Banking unit.
While they will probably stop short of emphatically signalling a move at either meeting, Lloyds expect the FOMC to hint that rates are likely to rise in the near future. We forecast two rate rises of 0.25% this year, in September and December.
Market expectations about near-term Fed policy have fluctuated sharply in recent weeks. At one point the probability of a June hike moved back above 30%.
“However, with the May payrolls rise of only 38k, the weakest number since 2010 Q3, markets are now priced for effectively a zero probability of any policy change next Wednesday,” says Herbert.