Saturday 26 May 2018

Daily Market Update: Sterling lifted by latest Brexit polls

Sterling slips back as BoE officials sound cautious on UK outlook
Sterling slips back as BoE officials sound cautious on UK outlook

Simon Barry

The main point of interest from markets over the past 24 hours or so has been a rally in sterling’s value on the fx markets.

The pound has risen by 1% against the dollar and by 0.8% against the euro, resulting in opening levels of $1.4510 and 78p respectively.  This comes on the back of the latest referendum polling data showing the ‘Bremain’ camp gaining in support.  In particular, the latest Telegraph ORB poll revealed that 55% of respondents say they support Remain (an increase of 4 points since the previous ORB poll in April) and 40% back Leave (a 3-point drop). 

While a short-term market reaction to such headlines certainly isn’t unreasonable given the implied reduction in Brexit risk, there are still reasons to be cautious.  For example, the headline figures from this ORB poll don’t tell the full story.  Voter turnout continues to be a major issue, and a potentially critical swing factor.  If we consider only those who say they will definitely vote, Remain’s vote share is steady from the previous poll at 51% while Leave’s share had edged lower by one point to 45% - a gap that falls within the margin for error. The contrast between the balance of views of the population as a whole (where Remain looks to have a clearer lead, on the ORB data at least) and those most likely to vote (where Remain has a lead, but one that is less assured) highlights the very important role that turnout on the day will play in shaping the outcome. 

Then of course there’s the issue that different polls - and even different methodologies from the same pollsters - can send conflicting signals.For example, ICM yesterday gave the results of two polls run in parallel: one (conducted by telephone) showing a 9-point lead for Remain, and one (carried out online) which showed a 1-point lead for the Leave camp.  Overall, it looks to us as if the balance of recent polls (say taking the average of the last 6 headline poll results) has the two sides very close, meaning that there’s plenty of scope for considerable ebb and flow in the Brexit debate over the coming five weeks, not to mention the scope for associated market volatility, especially in relation to sterling’s performance on the exchanges.

Elsewhere, yesterday’s May reading of the New York Empire Index was weaker than expected.  The headline index fell this month after two encouraging gains on the trot, with large declines in the shipments and orders sub-components underlining the weak tone.  While merely a gauge of activity in a single region, it is a disappointing outcome which suggests a faltering in factory-sector momentum in New York mid-way through the second quarter.  Attention now shifts to other regional indicators (including from Philadelphia and Chicago) for further clues on this theme ahead of the much more influential national ISM manufacturing survey results early next month.

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