We have been through a very long and tough EU referendum campaign but on Thursday, it is finally time for the British to decide: Do they want to remain or leave the European Union? Although more opinion polls have begun to show a majority to the 'leave' side, the two camps are almost equal in size. In addition, there are still many undecided voters although the number has declined through the campaign. Currently 10-15% of the voters say they do not know what to vote for (down from 15-20% previously). In other words, nothing is decided yet and it is not over until the fat lady sings, as we have said multiple times in recent weeks . While the opinion polls indicate a very close race, the implied probability of a 'Brexit' from Betfair odds is only 35%. That said, this probability has increased in recent weeks.
Risk sentiment has been really poor this week due to an increasing fear of a 'Brexit' among investors and we believe markets will be extremely sensitive to any news, polls etc. on the referendum next week. Some polling institutions have said they will not publish opinion polls next week so it is not certain that we will get much.
In FX Forecast Update: In the hands of British voters (17 June), we highlight that the GBP is very much the epicentre of 'Brexit' risk and there is set to be a 'knee-jerk' reaction either way next week . Given our spot risk premium estimates we expect EUR/GBP to decline to a 0.7500-0.76500 range under a 'remain' vote. Under a 'leave' vote it is very difficult to say just how much intraday GPB weakness there will be, but we want to stress that fundamental models do not rule out EUR/GBP rising to 0.90. More importantly, irrespective of the size of the initial reaction under a 'Brexit' we would expect the GBP to trade at much weaker levels for a prolonged period of time. In our base case of a 'Bremain' we forecast EUR/GBP at 0.76 in 1M, 0.76 in 3M, 0.74 in 6M and 0.75 in 12M.
Yesterday was a very sad day as MP Jo Cox (Labour, pro-remain) was murdered while campaigning in her constituency. A 52 year-old man was arrested by the police shortly after. It is speculated that it was a politically motivated murder as witnesses have said the killer shouted 'Britain first' during the incident. Both 'remain' and 'leave' suspended their campaigns both yesterday and today. It is difficult to say whether it will have an impact on the referendum outcome - we lean towards the view that it will not. The killing of Anna Lindh just a few days before the Swedish euro referendum in 2003 did not change the outcome.
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