Opinion polls show as many as one in three U.K. voters are undecided about whether they will vote and if they would back leaving or staying in the European Union at the June referendum, spurring debate about what a low turnout would mean for the result and for the pound.
Developments that could impact sterling in coming months are surveys on voting intentions, the selection of the official “in” and “out” campaign groups, the refugee crisis and political developments in the EU.
The spread between implied and realized volatility in the pound versus the dollar on the three-month tenor rose to a record on Thursday, as voters in the Netherlands used a referendum on a treaty between the European Union and Ukraine to rebuke Dutch and EU leaders.
The Dutch news prompted U.K. Prime Minister David Cameron to say he hopes the result won’t affect the British referendum, in a speech targeted at encouraging younger people to vote. Last month, he said the U.K. result is on a knife edge and could be decided by those who bother to vote.
Lynton Crosby, a political strategist who organized the government’s election campaign in 2015, says those in the “leave” camp are still more likely to cast a vote on polling day.
Most recent polls show the two camps are virtually neck and neck. End-March telephone polls, deemed to be more accurate, showed the remain camp’s lead had narrowed.
The turnout at the Dutch referendum was just 32 percent. If the turnout were anywhere near that low in the U.K. vote, it would raise the possibility of a U.K. exit, according to Nomura analyst Philip Rush.
Meanwhile, JPMorgan analyst Allan Monks says this risk may be overdone as interest in the “Brexit” debate looks high relative to past referendums and elections. Uncertainty over jobs and economic stability, versus attitudes toward migration and security are the factors that will impact the result, Monks adds.
Cameron’s 9.3 million pound plan to send a leaflet “to set out the facts” on the referendum to every U.K. household was attacked as “propaganda” by Justice Secretary Michael Gove, one of the leading campaigners for a U.K. exit.
The Bank of England said last month uncertainty over the U.K. referendum may hold back investment and growth, though MPC member Kristin Forbes said there’s not yet enough data to estimate the impact.
The U.K. current-account deficit surged to 7 percent of GDP in the fourth quarter of 2015, before the referendum date was known, and adds to concern a vote to leave could see a sharp slowdown in investor inflows. Standard Chartered analyst Eimar Daly says uncertainty is leading to reduced foreign inflows, with M&A deal announcement values down sharply since December 2015.
The Electoral Commission’s deadline to determine the official ‘‘leave” and “remain” campaigns is April 14, and the referendum period starts the day after. The decision gives the lead campaign groups higher spending limits.
JPMorgan says a successful implementation of the deal between the EU and Turkey to stem migration flow would lower the likelihood of “Brexit.”
UBS Wealth Management analyst Ricardo Garcia says if the deal leads to lower migrant inflows, that will be more important in voters’ minds than last month’s terror attacks in Brussels. Once the campaign starts formally and Cameron campaigns more pro-actively, it will be important to see if the undecideds make up their minds and which campaign they back. Most will probably favor staying in the EU, Garcia adds.
Polls show the “remain” and “leave” campaigns are fairly balanced, and the number of undecideds range from 16 percent to 28 percent in surveys since end-February.
RBC says betting markets are a better gauge of implied probabilities. For now, they show around 69 percent support for the “stay” campaign, according to betting odds website oddschecker.com.
UBS Wealth Management sees around a 30 percent chance of “Brexit,” while Citigroup puts the likelihood at 30 to 40 percent. Meanwhile, IHS sees 35 to 40 percent probability of a vote to leave.
The vote may spur persistent political and economic uncertainties that may not end even if the U.K. votes to stay, Citigroup analysts say.
Even if the U.K. votes to remain in the EU, divisions resulting from the referendum could lead to early elections, according to Morgan Stanley analysts. The bank’s economists say even if the “remain” camp wins, slower growth and weaker inflation would push the first BOE rate increase back to early 2017, while ING analysts say if the U.K. votes against “Brexit,” the BOE could lift rates as soon as November. Deborah Hyde, Bloomberg
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