Brexit – With GBP recovering, can Osborne swing it for the Remain camp?
City Index June 15, 2016 9:53 PM
<p>The pound is in recovery mode on Wednesday ahead of this evening’s Fed meeting. This is likely just a pause after another bruising day for risk assets on Tuesday. </p>
The pound is in recovery mode on Wednesday ahead of this evening’s Fed meeting. This is likely just a pause after another bruising day for risk assets on Tuesday. The yield on German 10-year government debt, after falling into negative territory for the first time yesterday, has climbed back above 0%; however sentiment remains fragile.
The key driver of today’s recovery could be news that more big companies including John Lewis and Rolls Royce have warned their employees about the impact of a potential Brexit vote on their businesses. The Chancellor George Osborne will also state this morning how a vote for Brexit will lead to an emergency budget and potentially more tax increases and spending cuts.
Interestingly, if Osborne can convince voters that Brexit will cause a financial hit to each one of us then he might be able to win the referendum for the Remain camp, but he faces an uphill battle. More of that battle below, for now, the pound’s “bounce” appears to be a reaction to the gloomy message about life outside the EU.
Keep calm, it’s only an opinion poll…or is it?
High levels of trader anxiety have been fuelled by the opinion polls in recent days, but what do the numbers behind the headlines actually mean? Pollster YouGov’s has investigated this question here.
The key finding is that by a large margin the British public believe that leaving the EU is far more risky than staying in, they also believe that a Brexit vote would be negative for our economy. So why is the Leave campaign doing so well? Crucially the same voters who believe that the economy will be adversely affected by a vote for Brexit do not think that their personal finances will be impacted. YouGov has found that more people would vote to remain part of the EU if they thought that they would be personally worse off by voting to leave.
The Remain camp needs to make it personal
If the Remain camp wants to turn this vote around then George Osborne would be wise to sound gloomier than ever in his speech with Alistair Darling later today. According to YouGov, Osborne and co. must make this connection with the voters for the Remain camp to have a reasonable chance of winning the referendum next week. If he succeeds then we could see a sustained recovery in the pound and other risky assets, if he fails and the polls continue to point towards a win for the Leave camp then GBP/USD could fall below 1.40, targeting 1.35 in the coming days.
A historical bias for Brexit
Osborne’s task isn’t easy. Another interesting find on the YouGov website was the historical EU referendum tracker. YouGov has been asking the public if they would choose to remain part of the EU since 2010. Interestingly, for much of 2010- 2013 the majority of people wanted to leave, with approx. a third of people saying that they would vote to stay in the EU. In 2014 the tide started to shift, with more people saying that they would vote to stay in the EU than leave it. Since the referendum has been announced, the Remain camp has seen its lead eroded, and in the last month the pendulum has swung back in favour of Brexit.
Not even Yellen can restore risk appetite right now
Although it is by no means inevitable that the UK will vote to leave the EU next week, time is running out for the Remain campaign. For once, it seems unlikely that even the world’s most important central bank, the Federal Reserve, can offer soothing words to traders when it meets this evening.
Now may not be the time to go against the tide of negative risk sentiment in the global financial markets, and this morning’s recovery in the pound and other risky assets seems timid at best. However, if the Remain camp can get the messaging right on the economic question in the next few days then the polls may start to tell a different story, only then does sterling stand a chance of a sustained recovery in our view.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.