Pound sluggish ahead of last Brexit polls, volatility eyed later

The pound continued to gain strength on Wednesday as traders and gamblers put their money behind Britain voting to remain in the European Union, with three opinion polls in the afternoon and evening offering potential for volatility.

Betfair said it had taken more than £0.8m of bets backing the 'Remain' campaign out of £1m placed after the BBC's televised Great Debate, with the online bookmaker giving a 77% implied chance that most voters will choose the status quo in Thursday's referendum.

Sterling was up 0.2% against the dollar to 1.4683, roughly a gain of 4% against the dollar over the last week, but down 0.2% versus the euro at 1.3005 just after midday on Wednesday.

A binary bet on the Remain vote offered by IG showed a 76% chance, having seen a massive jump over the weekend that continued on Tuesday (see chart below).

While financial and betting markets are pricing a high probability of a Remain vote, opinion polls suggest the vote is too close to call.

The last three opinion polls before the referendum begins are due to be released later in the day, which has the potential to move currency markets.

Berenberg economists noted that most opinion polls have shifted narrowly back in favour of Remain, with a small lead of about two percentage points according to their weighted average of poll data (see second chart).

An online poll from Opinium, which was the top online pollster at last year's General Election, is due at 1630 BST, before a 2200 BST release for another online polls from ComRes and expected at the same time from YouGov. Ipsos MORI is due to announce its final preview poll on Thursday morning.

With equity indices relatively calm, market analyst Jasper Lawler at CMC Markets said markets "seem to have got the pre-referendum volatility out of their system", with the pound only eking out small gains amid the lack of other economic data.

He added: "The sharp readjustment out of safe havens in favour of risky assets including the British pound in the last few days means markets may be underestimating the fallout from a Brexit. Even if betting and financial markets are proven correct and the UK votes against Brexit, the potential for political fallout in the aftermath is a downside risk."

Holger Schmieding, chief economist at Berenberg, said the current lead for the pro-EU side "does not seem to be clearly outside the potential margin of error" for opinion polls.

Schmieding said the experience of the Scottish independence referendum in 2014 and the 2015 general election supported hopes for a stronger last-minute shift in favour of the status quo.

"Of course," he added, "the volatility in the various Brexit risk metrics in the past months warrants a significant degree of caution. Also, it can be particularly difficult for polls to project the outcome of an unprecedented vote such as the Brexit referendum.

"The Brexit risk thus remains real. Still, the recent shift in polls could suggest that the risk may move below the 40% risk we had quoted in the last two weeks."

Looking to Friday, Credit Suisse said that while polling error or a last minute swing might deliver a strong win for the Remain camp, its view was that the outcome is still highly uncertain and the fallout the day after is likely to lead to a wile ride for markets.

"The correlation between betting market odds and global risk appetite has been extraordinarily high in the past few weeks. That suggests an immediate, large and highly correlated move in both safe and risk assets once the outcome is clear. In particular, a 'Leave' vote could push our measure of risk appetite into panic."