The EU Referendum & The Importance of Managing FX Risk: A Brief Update 18/5/2016
Such is the unpredictable nature of ‘polls’ particularly ahead of a divisive referendum like we the British public currently face, I felt it was important to provide a further update to my original post based on polling results released this week. And this update is directly related to the paragraph in which I laid out the potential scenario for what we could expect to see should a vote to ‘Remain’ in the EU prevail. The exact paragraph was as follows:
What to expect if we vote to ‘Remain’ in the EU
Should the UK vote to remain in the EU it is widely expected that Sterling will rally in the FX markets. The extent to which Sterling strengthens will in part depend on how close the polls are in the run up to the vote. The most recent YouGov poll has the ‘Remain’ camp ahead by just 2points. Should that gap fail to increase or indeed narrow further it will naturally generate more uncertainty as the deadline looms and as such further weaken Sterling. In this scenario we could expect a large correction and aggressive Sterling rally. Conversely, and seemingly unlikely at the moment, should the polls start to show a clear lead for the ‘Remain’ camp we would expect to see Sterling making gains ahead of the vote and as such any post-result rally would be more subdued.
I specifically refer back to my comments on the likelihood of the polls to show a clear lead for the ‘Remain’ camp. Well it would appear I made the cardinal sin of assuming the polling would remain relatively tight all the way to the 23rd June, as just this week we have had two polls released that place the ‘Remain’ in the EU camp quite a distance ahead of the ‘Leave’ camp. Those Polls were:
- ORB/Telegraph Poll – 55% Remain, 40% Leave
- Ipsos MORI/ Evening Standard – 55% Remain, 37% Leave
The significance of these polls has already impacted Sterling in the currency markets, with the Pound making substantial gains across the board, particularly following the Ipsos MORI poll released today. Now referring back to my previous post, should we see this comfortable lead for the ‘Remain’ camp persist in subsequent polls we would expect to see Sterling make further gains ahead of the referendum. And should those polls ring true (Don’t forget how wrong they were ahead of most recent UK General Election) and the UK votes to ‘Remain’ in the EU then we might expect to see more subdued strengthening of the Pound in the immediate aftermath due to the result being priced in ahead of the vote.
It’s worth stressing that these are just 2 polls, and there are a whole host of polls to come in the weeks ahead. This could simply be one twist in what could yet still prove to be a tight battle!