Pound plunges to two-month low as Brexit bets mount

The pound continued to fall on Brexit fears on Monday morning as further evidence pointed towards growing momentum behind the 'Leave' campaign 10 days before the EU referendum on 23 June.

At 0900 BST, sterling was down 0.5% to $1.4188, its lowest point against the dollar in two months, with a similar pattern occurring against the euro, falling 0.6% to €1.2588.

Following a poll on Friday that showed a large lead for the Brexit campaign and sent a major shiver through the currency, Monday saw bookmakers' odds on the ‘Remain’ campaign also fall sharply.

According to bookmaker Betfair the odds on the UK voting to stay Friday and a peak of 78% the day before.

The ORB poll for the Independent showed 55.0% said they were now backing the option to leave the EU, against 45.0% who said they were supporting 'Remain'.

A poll of polls by the Financial Times on Monday showed 'Leave' has taken the lead for the first time, at 46% versus the Remain camp's 44%, as momentum seems to build towards a Leave vote. Previously there has been strong advantage for the Remain campaign in telephone polls but this has now mostly disappeared.

"Sterling volatility – a proxy for Brexit risk – is above 2008/09 levels, and bookmaker implied odds have risen from 20% on 26 May to 33% today," said Berenberg economist Holger Schmieding. "An additional shift in favour of 'Leave' in the telephone polls could signal that the Brexit risk is rising beyond our call of 30%."

Where could GBP go from here?

The day after the 23 June vote, a Bloomberg survey of economists pointed towards the pound either sinking to its lowest level in more than three decades if an exit vote wins, or rally towards $1.50 if UK votes to stick with the status quo.

A drop to between $1.30 and $1.35 a day after Leave vote was the average opinion from the 20-plus economists polled, while a range of $1.45 to $1.50 was seen if the Remain campaign triumphs.

In a note to clients, HSBC analysts noted a sizeable increase in short sterling positions from hedge funds and others tracked by the Commodity Futures Trading Commission, which was coinciding with the poll shift towards Leave.

With the pound tanking as the Asia session moved to the European, Ipek Ozkardeskaya at London Capital Group said that despite the oversold conditions in the sterling, "the upside attempts are expected to confront solid resistance. The pound bears could eventually drag the GBPUSD lower toward the 1.40 mark".

Ozkardeskaya added: "The market remains comfortably short sterling in the run to the referendum. High volatility and choppy market conditions will be in play for those willing to trade the pound. Traders should be prepared for a two-side volatility, although the market remains skewed on the downside."

Euro and Swiss franc also eyed

The Bank of England meets on Thursday for the last time before the Brexit vote and is expected to maintain the status quo, with minutes released from the meeting likely to contain further strong warnings about the dangers of a split from the economic bloc.

The US Federal Reserve, Swiss National Bank (SNB) and Bank of Japan (BoJ) are also all meeting this week to discuss monetary policy.

The possibility of further monetary stimulus is distinctly possibly from the BoJ, though this was not enough to bring the yen bears enough momentum.

A surge in the Swiss franc is likely in the event of a Brexit, due to its popularity among investors at times of market stress, according to a Bloomberg survey, which has put the SNB on red alert for some months.

SNB officials are expected to counter such a move with more aggressive interventions, with some economists expecting a cut to the deposit rate from its already record, negative low.

Net franc long positions fell sharply last week and returned to negative territory for the first time since early March.

Ahead of the UK’s Brexit vote, Rabobank's senior forex strategist Jane Foley said she would expect the CHF to be better
supported in the next set of data.

She also noted that euro shorts lurched higher last week to their highest level since mid-March.

"Now that shorts have corrected from the extraordinary levels reached last year, the euro is likely to be more susceptible to bad news. We anticipate that a Brexit would have negative repercussions for EU coherence and for the euro," she said in a note to clients.