Jane Foley, Research Analyst at Rabobank, suggests that the decision by London Mayor Boris Johnson to campaign on behalf of the UK’s ‘Leave’ camp has been seen as a major blow to PM Cameron’s bid to remain within the EU.В
“As yet there are no published results from the established pollsters on how and whether opinions may have been altered following the weekend announcement of the EU reform deal and the confirmation as to which way high profile members of the ruling conservative party will campaign.В
Cameron will be hoping that his ability to forge a reform deal with the EU will win the support for many of the undecided voters. That said, this ambition is likely to be hindered by the relative popularity of Johnson and his proven successes as a campaigner. For investors it signalled a heightened level of uncertainty. The implication is that a ‘Leave’ vote in June could be compounded with even more political risk in the UK.
Insofar as political uncertainty is usually currency negative irrespective of its source, the next three months have the potential to bring significant downside potential for sterling and plenty of volatility. A What UK Thinks poll of polls is indicating the Remain campaign are ahead with 52% of the vote.В
The weaker tone of the pound if sustained will have inflationary implications for the UK and could result in the BoE’s hitting its 2% CPI target a little sooner than had been expected. That said, imported inflation acts in the same way as a tax increase and is far less desirable than demand led inflation. Also, given the risk that political uncertainty will impact investment in the UK, the growth could be affected.В
While sterling may garner a little solace from any pre-EU remarks from Carney today, in view of the real risk that the UK could vote to leave the EU in June, we have pushed up our 1 mth EUR/GBP forecasts to 0.79. Our forecast that EUR/GBP can return to the 0.70 area on a 12 mth month view assumes that the outcome of the referendum will be a success for the Remain vote. On a Leave vote in June we would expect EUR/GBP to head back towards the 0.85 area initially.”В