Brexit Predictions: The Impact on Markets

Brexit, Predictions, The Impact,  Markets, Macroeconomics, fx trader, forex

15 Jun 2016

Britain goes to the polls on 23rd June to decide its place in Europe. If recent polls and predictions are anything to go by, then the race looks tight. Several opinion polls have ‘leave’ ahead by 2 to 3 points, while other polls believe ‘remain’ will be victorious. The current ‘poll of polls’ has ‘remain’ ahead on 51% compared to 49% for ‘leave’. However, with the BBC reporting that as many as 15% of respondents ‘don’t know’ their voting intentions, it’s very much all to play for. As such, due to the uncertainty over whether Britain will leave the EU, the markets have also reacted with uncertainty. In this blog, we take a look at possible Brexit predictions, as well as the impact that a Brexit would have on the markets.

Will Britain Leave the EU?

Until the past couple of weeks, it looked likely that Britain would remain a member of the EU, thanks to what was perceived as the ‘remain’ campaign, led by David Cameron, having an ‘economic lead’. According to pollster and political advisor Sir Lynton Crosby, ‘remain’ at one stage had a 21 point lead on the economy. However, over recent weeks, this has shrunk to 8 points, and the polls have tightened as a result.

As a result, bookmakers have shortened their odds on a potential Brexit. Almost all still have Britain remaining in the EU as a clear and odds-on favourite, but Britain leaving the EU as a result of the referendum has now been cut to around 7/4. At one stage, it was a high as 4/1.

At present, the probability of the UK leaving the EU stands at around 28%.

How Have Markets Reacted?

Some have predicted that a potential Brexit is striking fear into the hearts of business leaders who have largely come out to support the ‘remain’ campaign. However, at this stage, this fear has not manifested itself in the markets greatly. At the present moment, it appears that we have not seen British assets eschewed on a grand scale. However, if the outcome becomes clearer, and it looks likely that Britain will leave the EU, this may happen, as the UK will no longer be a springboard to Europe. This will affect currency, equity and bond markets.

However, before the vote on June 23rd, some are expecting sharp swings in the pound. Recently, the pound was the only currency from the g7 group of industrial nations to fall against the dollar; falling by as much as 1.1%. This drop in the value of sterling came directly after a poll was released revealing that the ‘leave’ campaign had taken a 4 point lead. The pound also fell by 0.5% versus the euro.

The Organisation for Economic Co-operation and Development has downgraded the UK’s growth forecast accordingly. This year, it has been downgraded by more than any other major advanced economy, as it believes that a Brexit vote will send shockwaves across the globe. The UK economy is now expected to grow by 1.2% this year, which is the slowest pace of growth since 2012. Three months ago, it was predicted to grow by 2.1%, and last November, this figure was as high as 2.4%. As such, many believe that there has been a deterioration in the investment climate.