Sterling: Unsettled by Politics - ANZ
Research Team at ANZ, suggests that the opinion polls on the outcome of the referendum on EU membership (23 June) continue to show a very close-run contest.
“The latest poll-of-polls puts support for those in favour of remaining in the EU at 51% and for those against at 49%. As a result of this unsettled political backdrop, sterling has been volatile, but for the moment it seems to have found a base in the 1.35-1.40 range vs USD. However, for businesses and investors, the risk management question is: what would happen in the event of the UK voting to leave?
With regards to trade, when measured against total GDP, exports account for roughly 30% of UK national output. Just under 50% of those exports go to the EU and the vast majority of other exports are governed by EU trade treaties. While there is a two-year negotiation period for withdrawal in the event of an exit vote, it is not difficult to see how there are material risks of a sharp slowdown in activity – at least in the short run – were such a decision to be taken. There is also a widespread feeling that in the event of an exit vote the BoE may need to cut rates, while sterling could fall by 10-15%.
Another frequently asked question is what would happen to London’s role as a leading financial services sector? Some argue that the City could thrive in a lighter regulatory environment in the event of a decision to leave. However, the BoE has been at the forefront of introducing tough new regulation since the GFC so such optimism may not be warranted. Meanwhile, the UK is the largest recipient of FDI in the EU (about 40%) and much of that is into service-based industries in order to take advantage of the UK’s membership of the EU. Brexit could potentially threaten that.
Apart from political uncertainty, the BoE continues to endorse the recent GBP weakness as the lagged effects of earlier appreciation have helped to bear down on inflation (0.3% y/y). The inflation undershoot and political uncertainty suggest sterling should remain weak in the coming months.”
(Market News Provided by FXstreet)