UK: Brexit risk diminishes further – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound strengthened sharply as well yesterday supported by a further reduction in the perception of Brexit risk.

Key Quotes

“The last two phone polls from ORB and Ipsos Mori have shown a material increase in support for remain back towards levels recorded earlier this year when their lead excluding “don’t knows” was much wider at between 14 to 20 percentage points. Yet it is too early to confidently conclude that there has been a material shift back in favour of remaining within the EU.

The Ipsos Mori poll released yesterday stated that support for remain was boosted by a Conservative swing who have gone from being marginally in favour of leaving to a clear 60% saying they would vote to remain, although they are more likely to change their mind.

The government’s campaign of fear appears to be proving successful with almost two to one of respondents believing that the UK would be worse off for the first five years outside of the EU although on balance they expect that the UK will better off in the long-term. The polls reinforce confidence in our base case scenario that the UK is likely to vote to remain within the EU.

We estimate that the market is currently discounting a relatively low probability of Brexit at around 20%. The last time perceived Brexit risk was as low was back in February when cable and EUR/GBP were trading just above the 1.6500 and 0.7700-levels where spot is currently trading. With the perceived risk of Brexit already relatively low, the scope for the pound to strengthen further ahead of the referendum should prove limited. It is also notable that the low perceived risk of Brexit if maintained may make the Fed more comfortable to resume rate hikes in June.”