Daily Market Update: Decision day arrives
After what has been a deeply divisive - and at times poisonous – Referendum campaign, decision day has finally arrived as UK voters today take to the polls to decide on the UK’s future relationship with the EU.
The past few weeks have seen sizeable swings in the opinion polls, with a pick-up in support for Brexit earlier this month giving way to a renewed strengthening of support for Bremain over the last week or so. Sterling’s value on the foreign exchange markets has tracked these shifts: having traded sub 76p at the end of May, Eur/Stg then came under material upward pressure as the pound fell to close to 80p at one point last week in response to heightened market concerns about Brexit risks. But as the polls have moved back towards Bremain over the past week or so, so too has sterling unwound most of this latest bout of selling pressure, meaning that it trades just below 77p in early trading this morning. The latest opinion polls suggest the result could still go either way, though the bookies continue to have the Remain camp clearly ahead in their calibration of the odds, partly reflecting their belief in an underlying voter preference for the status quo in referendum-type votes.
There is little doubt that the outcome – whichever way it goes - will provide the basis for extensive discussions in the period ahead about what’s next for the UK economy (not to mention the UK and European political landscapes). In the event of a vote to remain in, focus in the weeks and months ahead will be on trying to identify the true underlying pace of growth in the UK economy following a period in which a number of indicators have shown signs of having been adversely impacted by economic uncertainty. In the event of a vote to leave, attention will intensively shift to what a post-Brexit UK-EU relationship (and indeed that between the UK and the rest of the world) might look like, and how long it might take for the UK’s new external arrangements to be put in place.
Either way, those issues will require considerable teasing out and won’t be quickly or readily resolved in the immediate aftermath of today’s vote. But one area where there we are likely to see instant reaction is the financial markets in general and the currency markets in particular. As noted in last week’s Bank of England MPC minutes: “the outcome of the referendum continues to be the largest source of immediate risk facing UK financial markets, and possibly also global financial markets”. “…an increasing range of financial asset prices has become more sensitive to market perceptions of the likely outcome. On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply”. Indeed, it is a widely-held view among financial market participants that news of a vote to leave would be most visibly and quickly seen in a (potentially large-scale) decline in sterling’s value on the exchanges. The corollary of course is that a vote to remain in would likely be associated with an appreciation of the pound as markets move to further unwind the Brexit risk premium. Note, however, that the risks here are not symmetric in our view, especially after sterling’s mini-rally over the past week or so i.e. sterling’s downside in a Brexit is likely greater than its upside in the event of Bremain. In any case, the next few days and beyond promise to be a highly eventful period for currency markets in particular to say the least.
In terms of things to watch over the coming 24 hours, note that there is no official exit poll. There may be some unofficial ones doing the rounds but in any case the first results are expected to come in shortly after midnight. It will be a relatively slow-burn initially, with just a dozen or so results expected before 2am, before the pace hots up with over a third of results expected to be declared by around 3am. Depending on how close the referendum is the outcome may well be apparent by that point. It should certainly be clear by 5am when almost 90% of results are expected to be declared.
As ever, our priority is to serve our customers and we will be here late this evening (until 9pm Irish time at least) to answer any customer calls. We will also be available early on Friday morning as the result becomes clear. We would also like to remind our Ulster Bank Trade enabled customers that they are able to book FX deals on a 24 hour basis through the week until 10 pm on Friday night. Updates will be available on our twitter feed @UB_FXMarkets.