When is the referendum? And what is the question?

The referendum will be held on 23 June 2016, leaving three months for UK voters to make up their minds as to how they will vote when asked.

“Should the United Kingdom remain a member of the European Union or leave the European Union?”

This choice of words is the recommendation of the UK Electoral Commission, who proposed this wording to modify an earlier version of the question, which was thought to favour the in campaign. It’s possible that we could see further amendments or redrafting of the question before the vote in late June.

What do the Markets want?

The markets and businesses are as much divided on this issue as anyone else, with various parties coming down on either side of the arguments. But whichever side of the debate they find themselves on market participants want to see two things: stability and certainty. However these commodities are likely to be in very short supply in the run up to the vote.

The UK public is broadly divided down the middle, when we look at those who already have a strong feeling on the issue. The key demographic will be those that ‘don’t know’ - a group which equates to some 10% or more of the populous.

However the variables extend well beyond the simple in out question, because if the out campaigns are successful (and let’s not forget that an anti-European party, UKIP, won 13% of the vote at last year’s UK general election) then there are ramifications for the continuance of the UK as a whole.

We need to talk about Scotland

The Scottish National Party or SNP, led by the charismatic Nicola Sturgeon, are committed to Scotland remaining in Europe, regardless of the outcome of the UK referendum. Raising the possibility of Scotland trying to gain its own independence once again and in turn to the breakup of the UK, as a whole.

The prospect of trying to negotiate an exit from the EU whilst at the same time trying to placate a pro-Europe, pro-independence Scottish Government is not an appealing one. This goes some way to explaining the renewed weakness in the value of the pound sterling. Remember the pound weakened sharply ahead of 2014 Scottish Independence vote, when it seemed that the independence movement would carry the day.

This time round it seems likely that sterling will be sensitive to the success of the out campaign. Because that success implies not only a change from the status quo but also the possibility of a UK breakup. The Bank of England will, in these circumstances, likely keep interest rates on hold and liquidity plentiful. Again adding to the downward pressure on the UK currency.

Chart A shows ‘UK Sterling Index’: the pound’s trade weighted basket performance.

Brexit, WhatImplications, Macroeconomics, David Cameron,  fx trader, forex Chart AChart A. UK Sterling Index

As we can see from this chart, sterling has recently broken below some key supports, when measured in its trade-weighted basket. The area around 82 looks important now as possible resistance in any rally. Whilst on any further move lower we can watch for a retest back to 79.80 - a level we have not visited since December 2013.

Hard to call right now

Markets will inevitably follow the opinion polls closely on this issue. However given the degree to which the pollsters miscalculated the general election results, they may not provide any kind of reliable indicator as to the thinking of the average UK voter. Betting markets might provide a better guide, indeed they were more in tune with public opinion in May 2015. But I think it’s fair to say that UK centric markets will be skittish over the next three months, or until such time as the in campaign can clearly demonstrate an unsalable lead.

Darren Sinden
Market Research Director
Admiral Markets