Sterling has fallen sharply today against major currencies as global investors woke up to the risk of Brexit.

At the end of last week, British Prime Minister David Cameron announced that he had successfully negotiated a new settlement for the UK and European Union along with announcing the date of the UK’s referendum on its EU membership – due on the 23rd of June.

With the new deal, Cameron and the government officially recommended the UK to vote to remain in the union, although several significant cabinet members have publicly opposed the government’s position and have begun to campaign to leave the EU. Most notably, the Mayor of London – Boris Johnson – has also stated his intent to campaign for Brexit. Given his popularity, Johnson’s decision is a blow for the government, especially as he is seen as one of the most influential public figures for those that are undecided.

Negative market reaction

In reaction to the news flow, sterling is currently down just under 1.8% against the US dollar (lowest level since 2002) and also down 0.7% against the euro compared to end of day prices on Friday. We highlighted the risk of further falls in sterling in the latest Schroders Economics & Strategy Viewpoint, where we concluded that the UK’s poor fiscal and current account positions leave it vulnerable to capital outflows, and that markets had not adequately priced-in the risk of Brexit. UK gilts have also underperformed today, with the 10-year gilt – favoured by international investors – seeing the biggest sell-off (rise in yield). As for equities, the FTSE100 is up so far today, but is underperforming most European bourses. Notably, stocks of property builders/developers are mostly down today, which could be negatively impacted if Brexit was to lead to less demand from overseas buyers of UK property.

Probability update

Voting intentions polls continue to suggest the majority of voters want to remain in the EU. Our poll-of-polls suggests that the stay vote is running at around 48%, with the leave vote at 38%, leaving 14% undecided. However, looking at the historical data from individual polling companies, we can see a slow swing toward the leave camp.

Betfair betting markets suggest the implied probability of Brexit is currently 34% – up slightly from around 28% from the start of the month.

Overall, the market reaction to the start of campaigning by both sides ahead of the referendum is largely as expected. We expect the polls to swing in both directions in coming months, which will have an impact on the sentiment of investors.

Azad Zangana, Senior European Economist & Strategist
22 Feb 2016