Pound Falls as Brexit Concern Returns Alongside Subdued Data

  • Leave campaign focuses fire on immigration; Cameron on economy
  • Sterling extends declines versus the dollar and the euro

Brexit: Will the Polls Get it Right?

The pound fell for a second day versus the dollar, extending its biggest drop in 10 weeks which was triggered on Tuesday by a poll that signaled an increase in support for Britain to leave the European Union.

Sterling weakened for a third day against the euro as U.K. economic data and investor concern over a possible Brexit continued to weigh on the currency. With the pound increasingly prone to sways in the polls, one-month volatility versus the dollar climbed to its highest level in more than seven years.

Less than three weeks before the June 23 referendum, the pro-Brexit campaign regained the initiative by focusing its fire on immigration, the area where polls show it has an advantage. The “Remain” camp is sticking to its own core area, the economy, with a warning that leaving the 28-nation EU would endanger 107,000 manufacturing jobs.

The Organization for Economic Cooperation and Development strengthened Prime Minister David Cameron’s case for staying in the EU as it cut its U.K. growth forecast Wednesday and repeated its warnings about the economic damage a vote to leave would cause. The bosses of Siemens AG, Airbus Group SE and GKN Plc issued a separate warning that a vote for Brexit would endanger future investment and manufacturing jobs.

With campaigning stepping up and becoming increasingly bitter, polls offer conflicting views of the mood of the electorate. The latest YouGov poll for Handelsblatt showed support for the two sides neck-and-neck at 40 percent, making it increasingly difficult for traders to decisively bet on the final outcome.

The pound has whipsawed as polls forecasting the outcome of the vote have swayed between signaling a victory for the pro-EU camp to one for the “Leave” camp. Sterling rose as much as 2.8 percent against the dollar in the last two full weeks of May when the “Remain” camp was seemingly gaining traction.

This ascent was halted and the pound fell by its most in more than two months when a contrasting poll, released Tuesday, showed the “leave” camp in the lead.

‘New Trend’

If the poll seeing the “leave” campaign ahead is “a new trend, then sterling near $1.45 looks a little too rich and we will probably see it trending back lower,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “I wouldn’t be surprised if we do see disappointing data alongside the poll news potentially seeing us back to mid-to-low $1.43s prior to the end of the week.”

The pound fell 0.5 percent to $1.4410 as of 4:41 p.m. London time, after sliding 1.1 percent on Tuesday, the biggest drop since March 22. It weakened 0.8 percent to 77.51 pence per euro, having depreciated 1 percent a day earlier. A gauge of sterling’s one-month volatility versus the dollar climbed to 20.6 percent, the highest since 2009.

Markit Economics’ Purchasing Managers Index showed Wednesday that while U.K. manufacturing returned to growth in May, the pace remained subdued and was a likely drag on the wider economy. In a separate report Wednesday, U.K. mortgage lending rose the least in more than three years in April, further clouding the outlook for sterling.

The Organization for Economic Cooperation and Development said Wednesday it cut its U.K. growth forecast and repeated its warnings about the economic damage a vote to leave the EU would cause.

Gilts Advance

U.K. government bonds advanced as a drop in stocks and oil helped boost demand for the safest sovereign securities. Yields on benchmark 10-year gilts touched their lowest level in two weeks.

“Risk appetite has clearly taken a turn for the worse at the start of June as investors fret about the global picture,” said Nick Stamenkovic, a strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Renewed risk aversion is giving core government bonds a boost and gilts are benefiting from that as well.”

Opinion polls “suggesting that the ‘leave’ campaign could potentially win” are starting to increase the downside risk to the U.K. economy and “hence yields have fallen accordingly,” he said.

The 10-year gilt yield fell six basis points, or 0.06 percentage point, to 1.37 percent, having touched 1.36 percent, the lowest since May 16. The 2 percent security due in September 2025 rose 0.54, or 5.40 pounds per 1,000-pound face amount, to 105.48.

Gilts earned 5.9 percent this year through Tuesday, according to Bloomberg World Bond Indexes. That compares with a 3.1 percent return on Treasuries and 4.1 percent for German sovereign securities.

Watch next: Team Brexit Gains Momentum as Vote Nears, Polls Suggest

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