Brexit: It is not over until the fat lady sings – Danske Bank

Research Team at Danske Bank, notes that in recent weeks we have seen that Brexit fears have diminished, but last week has shown that it is not over until the fat lady sings.

Key Quotes

“An ICM phone poll (which are usually biased towards ‘remain’) released early last week showed that ‘leave’ was ahead of ‘remain’ (45% vs. 42%). ICM’s online poll supported this (47% support for leave, 44% for remain). The phone poll in particular attracted attention, as ‘remain’ was comfortably ahead in the previous survey. Betfair’s implied probability of a ‘Brexit’ has risen from 18% to 30% in a short period of time. Overall, the opinion polls continue to signal a close race with broadly speaking 40% support for remain, 40% for leave and 20% undecided.

Brexit concerns have reappeared in financial markets and GBP has dived substantially this week on a released poll showing a surprise lead to the leave camp. GBP/USD fell from Tuesday’s high of 1.4725 to currently 1.4420 while EUR/GBP rose 2.2% in the same period. Polls of late had been showing the Remain camp comfortably in the lead and GBP has performed strongly over the past few weeks as Brexit risks have been priced lower.

However, last week’s price actions underline that polls will probably remain the key driver for GBP going into the referendum on 23 June and as the referendum is moving closer we expect Brexit concerns to build up further as long as the polls continue to indicate a close race between the remain and leave camps.

Hence, we still see risks skewed to the upside for EUR/GBP and expect volatility to increase as the Election Day approaches. According to our Brexit risk premium estimates, 1.25pp is currently priced in the EUR/GBP spot rate (two std dev. confidence interval of 0 to +2.5pp). This implies that EUR/GBP is likely to trade at 0.7550-0.7780 post the election in the event of a remain vote.

Last week, David Cameron appeared on a Sky News EU referendum programme repeating most of his already known arguments on both economics and immigration. On ITV’s Good Morning Britain today, Cameron said that he will not have to step down in case of a Brexit.

What to watch this week

On Tuesday, Prime Minister David Cameron and UKIP leader Nigel Farage answer questions from the audience on an ITV EU referendum programme. On Thursday, ITV stages an EU referendum debate between leading politicians from both ‘remain’ and ‘leave’.

In terms of data releases, watch out for production and construction data for April as well as the NIESR GDP estimate for May.”