Opinion polls continue to signal a close race but 'remain' is still ahead in most polls. Most notable was the Ipsos MORI poll published two days ago, which showed a 55% to 37% lead for 'remain' (from 49% to 39%). Although the poll showed a big lead for 'remain', we think one should be careful not to over-interpret the poll result. The poll was conducted by phone, which usually means a bias towards 'remain' (see YouGov).
In the FX markets, the GBP rallied sharply this week supported by polls showing an increasing lead for the 'remain' camp and stronger-than-expected economic data. While some of the GBP strengthening is justified by the strong data and an increase in short-dated UK interest rates, our short-term financial models suggest the GBP rally is beginning to look overdone. In particular, GBP/USD currently looks stretched and is currently 2pp overbought according to our models. According to our Brexit Risk premium estimates, less than 1pp (2 std dev. confidence interval of -0.5 to +2pp) is currently priced in the EUR/GBP spot rate. This implies that EUR/GBP is likely to trade at 0.7500-0.7740 post the election in the event of a 'yes vote'. As argued in FX Forecast Update: In the shadow of Brexit (18 May), we still see risks for EUR/GBP skewed on the upside going into the election.
What to watch next week
In terms of data releases, next week is a quiet week but we expect markets to continue to be sensitive to any polls, comments and/or reports on the upcoming referendum.
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