After seeing a hit in the initial Brexit discussions sterling has rebounded as a remain vote looks more likely. But what are the expectations for sterling in the 3 weeks left before the EU referendum?

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Laura Suter on May 31, 2016 • 1 answer
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Uncertainty over the EU referendum has already affected the UK economy. We have seen a sharp decline in the exchange rate since the start of 2016, and probably also some delay in planned investment in the UK by domestic and foreign businesses. Sterling regained some ground in late April and May, a trend that could continue if investors become more confident in a “Remain” victory, but history suggests there will be more bumps on the road between now and 23 June.

At the Treasury Select Committee in March, Mark Carney, the governor of the Bank of England, has repeated his view that a Brexit vote possibly poses the “biggest domestic risk” to the country’s economic outlook in the short and medium term. Though the currency has recovered recently, the exchange rate remains 5.6% lower on a trade-weighted basis than at the turn of the year. During the referendum campaign, the cost of insuring portfolios and business activities against further sterling weakness has spiked to the highest level since 2010, and derivative markets are forecasting that sterling volatility will remain high well into the summer.

In general, we expect sterling to remain weaker than predicted throughout the campaign. Britain’s reasonably sound fiscal position suggests that gilts would be less affected, and short-term money market rates are likely to be held down by the Bank of England’s “no change” stance on rates. But in past episodes of political uncertainty—such as the Scottish referendum in 2014— we have seen the yield curve steepen slightly relative to the US, and we could see that repeated if the polls tighten again.

Notes: Unless otherwise stated, all data is sourced by Factset and J.P. Morgan Asset Management as at 1 June 2016. Please view J.P. Morgan Asset Management's full disclaimer here: https://uk-edge.centaur.jpmorgan.com/pages/about-jp-morgan-ukedge

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Stephanie Flanders on Jun 03, 2016
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