Pound surges as Brexit probability falls to lowest in weeks

Sterling surged higher on Monday as the implied probability of Britain voting to exit the European Union in Thursday's referendum showed a 'Remain' vote was more likely.

Odds from bookmaker Betfair showed the implied probability of a Remain vote had risen back to 78% on Monday afternoon from 65% on Friday, while the chances of Brexit had fallen to 22%.

Sterling spiked up more than 2% to 1.4646 against the dollar and 1.4% to 1.2905 against the euro.

Paddy Power said that, by 1430 BST on Monday, Remain was trading at odds that implied an 80% chance, thanks to more than 10 five-figure bets over the weekend, with more than 70% of the total money the bookmaker has taken being for Remain so far.

Campaigning for the vote resumed on Sunday after a three-day hiatus following the killing of pro-EU MP Jo Cox.

After the failure of polls to predict the results of the UK general election, betting exchange odds are thought to provide the better signal to the likely outcome.

However, some in the City have suggested heavy betting money indicating a strong Remain win are "wishful thinking".

Schoders multi-manager head Marcus Brookes pointed out that, as polling data suggests City workers overwhelmingly support Remain, "it might be they found the evidence that supported their own view - known as confirmation bias - choosing the betting exchange view over the polls. Recent data seems to suggest that the polling data might prove to be a better guide this time."

Polls over the weekend indicated the 'Leave' campaign had lost their lead, while several Sunday newspapers came out on to support one or other side of the referendum debate.

The first phone poll conducted entirely after last Thursday's tragic killing of MP Jo Cox showed 'Remain' had regained the lead, with pollsters Survation on behalf of the Mail on Sunday finding a majority of 45% of respondents backing the option of the UK remaining inside the EU, versus 42.0% who favoured 'Leave'.

Another poll carried out by YouGov for the Sunday Times, a third of which was conducted before Cox's killing, put support for 'Remain' at 44.0% and 'Leave' at 43.0%.

On Saturday, Prime Minister David Cameron wrote in The Daily Telegraph that quitting the EU would trigger a probable recession and there would be "no going back".

Comment and analysis

On Monday, Paddy Power politics trader Stephanie Anderson said a surge in support for Remain had taken total turnover at the bookmaker to well over £1.2m, comfortably surpassing takings for the Scottish independence referendum.

"In theory, undecided voters are more likely to follow status quo as we near the vote and that’s probably why we’re seeing high-stake punters placing chunky bets on Remain as Britain prepares to hit the polling stations.”

Forex analyst Jane Foley at Rabobank said many institutional investors and corporates are likely to have retreated to the sidelines "to watch the spectacle unfold" and, since volumes are down, "it is almost inevitable that choppy trading conditions with persist for the pound in the coming sessions".

She said that even if Brexit uncertainty is wiped away on Friday, she assumes the bounce in sterling over the past couple of sessions will extend to take GBP/USD back to the 1.49 level in a one-month view.

"That said, while a ‘Remain’ vote this week would draw a line under one set of political uncertainties, it could open the door to another and these could ensure that sterling is subject to greater than average levels of volatility during the second half of the year."

On a technical note, Swissquote analysts said the new GBPUSD highs are bullish, having broken the resistance at
1.4597 (07/06/2016 reaction high), confirming the underlying bullish trend.

"Resistance is given at 1.4735 (a 26 May 2016 high) and a stronger one is located at 1.4762 (a 3 May high). Hourly
support can be located at 1.4430 (gap open high)," Swissquote wrote in a note to clients, expecting to confirm deeper selling pressures as gaps are closed.

"The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (the 23 January 2009 low), as long as prices remain below the resistance at 1.5340/64 (a low from 4 November 2015 and the 200-day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound."