GBP Rally Supported Partly by Big Lead for ‘Remain’ Camp – Danske Bank

GBP Rally Supported Partly by Big Lead for ‘Remain’ Camp – Danske Bank

Research Team at Danske Bank, notes that the GBP rallied sharply last week supported partly by big lead for ‘remain’ in biased phone polls.

Key Quotes

“Opinion polls continue to signal a close race but ‘remain’ is still ahead in most polls. Most notable was the Ipsos MORI poll published two days ago, which showed a 55% to 37% lead for ‘remain’ (from 49% to 39%). Although the poll showed a big lead for ‘remain’, we think one should be careful not to over-interpret the poll result. The poll was conducted by phone, which usually means a bias towards ‘remain’.

In the FX markets, the GBP rallied sharply this week supported by polls showing an increasing lead for the ‘remain’ camp and stronger-than-expected economic data. While some of the GBP strengthening is justified by the strong data and an increase in short-dated UK interest rates, our short-term financial models suggest the GBP rally is beginning to look overdone.

In particular, GBP/USD currently looks stretched and is currently 2pp overbought according to our models. According to our Brexit Risk premium estimates, less than 1pp (2 std dev. confidence interval of -0.5 to +2pp) is currently priced in the EUR/GBP spot rate. This implies that EUR/GBP is likely to trade at 0.7500-0.7740 post the election in the event of a ‘yes vote’. As argued in FX Forecast Update: In the shadow of Brexit (18 May), we still see risks for EUR/GBP skewed on the upside going into the election.”