Pound Strengthens in Final Hours Before U.K. Decides Its Future

Updated on
  • Betting odds signal ‘Remain’ outcome overwhelmingly favored
  • Sterling one-week implied volatility rises with polls divided

Britain Needs to Set Example and Leave, Says IDS

The pound gained with less than 24 hours to go before the landmark U.S. vote on membership of the European Union begins.

Brexit on Bloomberg:

A gauge of sterling against a basket of currencies advanced a day before Thursday’s referendum. The rally continued late Wednesday as Comres poll showed 48 percent "Remain" and 42 percent "Leave," while a Yougov poll showed 51 percent "Remain" and 49 percent ‘Leave.’

"The market’s behavior over the last several days underscores just how jumpy investors have become ahead of the referendum," said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank in London. "It appears that much, if not most, of the referendum risk premium may have been squeezed out of sterling."

The pound rose 0.4 percent to $1.4707 as of 5 p.m. New York time, after appreciating to $1.4783 on Tuesday, the highest level since Jan. 4. The British currency weakened 0.1 percent to 76.83 pence per euro, halting a five-day gain. With polls staying mixed up until the final day before voting, a measure of the pound’s anticipated price swings in the coming week climbed for first time in three days.

Sterling rallied 0.4 percent to $1.4762 shortly after the close.

The pound’s behavior mirrors that seen during the referendum on Scottish independence in 2014. Back then, the currency rallied strongly in the run-up to the vote, and peaked at about 2:30 a.m. after polls closed, as early results showed the campaign to maintain the union would prevail.

Harks to Scotland

The Scottish referendum, however, carries a cautionary tale for pound bulls. Once the result was clear, attention quickly switched to the prospects for the U.K. economy in the aftermath of the vote. The next day, sterling ended 0.7 percent lower. It has yet to return to the high of $1.6525 reached just hours after the first results were published.

Since the momentum shifted last week toward a “Remain” victory in polls, the pound’s rally has already taken it to levels that some analysts said would prevail immediately after a decision to stay in the EU. The median estimate in a Bloomberg poll of economists earlier this month was for sterling to trade in a range $1.45 to $1.50 the day after a pro-EU victory.

Downside Forecast

Declines in the event of a Brexit may be even more pronounced. Most economists saw a drop to below $1.35 the day after such a vote, which would be the lowest since 1985, and represent a drop of about 8 percent from current levels.

The Bloomberg British Pound Index, which tracks sterling against seven major peers, rose 0.1 percent and reached its strongest level since May on a closing basis. It has advanced about 3.4 percent since slumping to a more than two-month low on June 14. The gauge is still down about 4 percent this year.

“More and more people are thinking the “Remain” camp will come through on the day, so there is more cutting down of short-sterling positions,” said Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd. “It’s more a shift of sentiment than any particular poll or headline.”

— With assistance by Netty Idayu Ismail, David Goodman, and Narayanan Somasundaram

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