O’Neill: Markets pricing in remain and pound could reach $1.56

Bill O'Neill, UBS Wealth Management
Bill O’Neill, UBS Wealth Management

Markets are pricing in a remain in this week’s EU membership referendum and the pound could reach $1.56 before the end of the year says UBS Wealth Management head of UK investment office Bill O’Neill.

Yesterday saw the biggest one-day gain in sterling since 2009, with the pound putting on more than 3 cents against the dollar, hitting $1.4693 yesterday, and stood at $1.474 at noon today. Yesterday also saw the FTSE100 close 3 per cent higher.

Betting odds have also moved in favour of remain, with Ladbrokes now showing a 78 per cent likelihood of a vote to stay within the EU, versus a 22 per cent likelihood of leave. The bookie was quoting odds of 57 per cent for remain versus 33 per cent leave as recently as two weeks ago.

O’Neill says the Bank of England’s August inflation report will be a pivotal factor in determining the strength of sterling.

O’Neill says: “Markets are now assuming a remain outcome, with sterling edging up slightly against the dollar this morning following the significant gains of yesterday.

“Polls released overnight suggest a swing back to show a mixed picture, but there is a sense that the momentum favouring leave has been halted. Additionally, betting odds are now also pointing to that outcome. It is worth bearing in mind that the odds have consistently been in favour of remain, despite the narrowing seen last week.

“We have seen a significant move in the futures markets over the past few days, which a week ago implied a 50% probability of a rate cut by the end of the year. Today that probability stands at 24%.

“We expect that sterling will continue to make gains if there is a big turnout on Thursday. A  further improvement in prospects for the Remain camp could see sterling target 1.50 against the US dollar going into the poll.

“After polling day, should a remain outcome be confirmed, the market will immediately begin to focus on underlying indicators and in this scenario we can envisage sterling reaching $1.56 within a year.

“The Bank of England’s inflation report on 4th August will be an important moment, whether the UK opts to remain or leave. At that point, the market will have a good sense of the economic outlook and the Bank’s likely reaction. It will be a pivotal point in the direction of policy for the last months of the year.”

Warwick Business School assistant professor of finance Daniele Bianchi says: “If the UK votes for leave we should expect a substantial depreciation of sterling across major currencies in the very short-term. Volatility of the exchange rate against the euro and US Dollar is likely to increase as well, reflecting market uncertainty on the consequences, both politically and economically, of leaving the EU with a potential sell-off in sterling denominated assets.

“The pound reacted quickly to opinion polls over the last week and will probably keep doing that as news on how the transition procedure to leave the EU unfolds.

“Another source of uncertainty that a leave vote could trigger is political uncertainty. Brexit campaigners are a minority in the current government and a vote for Brexit could lead to political turmoil and a call for a new general election.

“In the short to medium-term, this could also be reflected in the volatility of sterling against major currencies and financial markets as a whole, making the sterling devaluation persistent in the medium term.”