GBP/EUR Rate Forecast to Pivot Around 1.30 on Eve of EUref

The pound to euro exchange rate (GBP/EUR) is seen consolidating on the eve of the UK's historic vote on its continued membership of the European Union but in these low liquidity conditions don't be surprised if big swings happen.

• On the eve of EU vote the poll of polls is at 51% Remain, 49% Leave. Betting markets show 70%+ chance that this could be the outcome of the actual vote
• "With the polls as close as they are, the Bookies still maintain a 73% chance of a 'REMAIN' win - hence markets are incredibly chilled out!" - David Buik, Panmure Gordon
• Soros warns on Brexit being a ‘black Friday’ for sterling, we disagree
• Institutional analysts update with their targets on GBP/EUR and GBP/USD in the wake of Thursday's vote

The pound to euro exchange rate is today seen trading at 1.3029 - above the key 1.30 pivot level that could well be where trade gravitates until results start coming through.

This would be a typical reaction by markets which tend to enter a sideways mode ahead of a big event.

However, as traders stand back from the market, so liquidity starts drying up.

With less people in the market there becomes the risk that even the smallest trades are able to have notable impacts on the exchange rate.

So while sideways trade over coming hours should be the default, we are not ruling out any swings.

The bottom line though is that directionality is unlikely to prevail until markets get a sense of the outcome of the vote.

Make sure you are aware of how the results night will play out and which constituencies are important in telling us which way the vote is going. We have a good article on the matter here.

Sober Reminder from George Soros Sees GBP/EUR Settle at 1.30

Perhaps the halt in GBP's rally have George Soros to thank.

The infamous speculator has warned that, "Sterling is almost ­certain to fall steeply and quickly if leave wins the referendum."

Soros told The Guardian: "I would expect this devaluation to be bigger and also more disruptive than the 15% ­devaluation that occurred in September 1992, when I was fortunate enough to make a ­substantial profit for my hedge fund investors at the expense of the Bank of England and the British government."

George Soros's famously nearly crashed the pound back in 1992 when his Quantum Fund led a field of speculators who borrowed UK gilts only to sell them and buy them back later at cheaper prices.

Latest Pound/Euro Exchange Rates

	Live: 1.1451▲ + 0.07% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1062 - 1.1107
**Independent Specialist	1.1291 - 1.1336 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

They repeated the trade every few minutes, making a profit each time. Soros apparently made £1bn from selling sterling he didn't own.

By mid-morning the selling was so intense that Bank of England officials were buying £2bn of sterling an hour to try and ensure the UK currency remained afloat.

We believe that the chances of a Black Friday event happening are highly unlikely, find out why here.

Despite our views, Soros has provided a sobering reality check - Brexit can happen and the pound can certainly fall. 

The pound to euro exchange rate has settled below the 1.30 resistance area which the charts confirm has been a threshold that sterling has struggled with at various points in 2016.

The currency failed to advance beyond here through February and the first half of March.

Clearly there is a good supply of sterling at this level and it will take another piece of good news to encourage further buying interest.

Should a break transpire we would forecast gains towards the May highs at 1.32.

GBP Forecasts on a Remain Vote: Don't Expect Strength to Last

The outlook for sterling has turned positive as a result of the shift in risk appetite seen on markets at the start of the new week.

However, signs of the recovery were being written into the charts from Thursday the 16th onwards and the momentum has merely accelerated.

Kit Juckes, a foreign exchange analyst with Societe Generale, believes GBP/USD would bounce to 1.50 on a Remain and fall towards 1.30 in a Leave vote, a pretty symmetric reaction initially.

However, and this is interesting, Juckes believes the bounce we are witnessing, and will likely see extend, should prove fleeting.

“Longer-term, we'd sell 1.50 and sell into any bounce,” says Juckes. Please see here for more detailed coverage.

This is a view shared by Morgan Stanley who have also written to clients telling them that 1.50 is where they should look to enter GBP/USD shorts.

Analyst Asmara Jamaleh at Intesa Sanpaolo agrees on the 1.50 target:

"If the Remain campaign prevails, the pound’s immediate reaction, on the other hand, should be a rebound, against both the dollar, initial upside towards GBP/USD 1.50."

Regarding the pound to euro exchanage rate, the initial upside target set by Intesa Sanpaolo is 1.33.

For GBP/EUR a Leave vote will produce a knee jerk reaction lower as the immediate reaction will be to sell Sterling. 

"But the secondary reaction will be to sell the Euro as a UK exit could possibly signal the beginning of the end of the EU," says Lucy Lillicrap, an analyst with foreign exchange brokers AFEX.

This could result in a drop, followed by a recovery.

A Reuters poll at the beginning of May suggested a number of countries including France, Germany, Italy, Spain and Belgium would like their own referendums with one third of the 6000 people polled saying they would vote to leave the EU if given the chance.

June 26th is the date for the Spanish election and the summer months could well see another migration crisis.

The Eurozone is still in deflation and Europe is showing no signs of changing its structure – fiscal or otherwise.

When you also consider that the UK is the second largest economy in the EU and contributes 9% of its budget a Leave vote is like to be as detrimental to the Euro as it is to Sterling the long run.

"If the UK votes to remain on Thursday the Eurozone still has its own problems as discussed above and we expect GBP/EUR to move higher to target last year’s high in the 1.4400 area," says Lillicrap.

Above: Projected direction for GBP against the euro, image courtesy of AFEX.

A Positive Shift in Sentiment

Traders have been keen to ensure they do not miss out on the potential profits to be made on a win for Remain - the move started last Thursday and accelerated this week with weekend polling showing the shift towards Leave required to secure a victory is not forthcoming.

The move has gained fresh impetus with the release of the final Survation poll ahead of the vote. It has been revealed that Leave commands 44% of the vote while Remain holds the edge at 45%

In a survey for The Telegraph, ORB International report support for Remain stands at 53% and Leave at 46%.

This is a significant eight-point net reversal from last week, when Leave held a one-point lead among definite voters with 49% to Remain’s 48%.

Driving the shift in sentiment has been a changing tone to the campaign with the Leave camp aquiring a sour note following the death of pro-EU MP Jo Cox, apparently at the hands of a hard-right fanatic.

The conotations were almost immediately picked up by the market which bought GBP following the event.

"In some ways, it took the tragic death of Jo Cox for people to wake up to the positive message that she purveyed on the benefits of integration and tolerance. Perhaps it is a coincidence, but that incident has seemingly formed a turning point for the ‘remain’ campaign, with the improved fortunes of both polls and the pound ever since," says Josh Mahony at IG, the spread betting providers.

Traders will be worried that by the time a Remain victory does transpire, the lion's share of the move may have already taken place.

The What UK Thinks poll of polls remains evenly split at 50/50 while the Financial Times poll of polls puts the split at 40/40 on account of undecided voters.

More importantly though, odds on a remain vote, as implied by Betfair, the betting marketplace, remain at around 70% and we would expect the probability to improve over coming hours.

Last week odds fell to as low as 58%, and GBP suffered as a result.

"Those wondering why the odds favour Remain to such a wide margin while the polls essentially show a deadlocked race, must understand that in the past referendums from Quebec to Scotland the polls overestimated the Leave sentiment by as much as 5%-8% therefore the bookies are confident that even money polling will result in a Remain win," says Boris Schlossberg, a Director at BK Asset Management.

All the above suggest the incumbent, if you want to call it that, should prevail.

Confirmation in shifting sentiment was seen on Monday morning with the news that high-profile Conservative, Baroness Warsi, had shifted sides and joined the Remain campaign.

Warsi cited a controversial poster released by fellow Brexiteer Nigel Farage for the defection saying the Leave campaign had adopted "hateful xenophobic" tactics.

While Warsi's profile in the referendum was arguably negligible, with some saying she had never actually joined the campaign, it is suggestive of how Leave is becoming associated with the far right movement.

Beware - Volatility to Stay Elevated Near-Term

Remember that these gains could well be symptomatic of the volatility in the sterling market-place that we have long been anticipating.

Therefore, be prepared for any down moves that may transpire over coming days.

“Market sentiment characterised by risk aversion should initially prevail as we do not expect the Bremain camp to make any conspicuously higher gains in the polls during the last few days until the referendum. Volatility could remain elevated,” says Ralf Umlauf, an analyst with Helaba in Frankfurt.

ING's Krpata also has a word of caution for those watching sterling:

"Given the large degree of re-pricing and the still very close nature of the polls, although the momentum behind the Leave camp seems to have stalled somewhat, the outcome still remains a very close call. 

"We would expect the GBP gains to pause ahead of the referendum, with polls remaining sterling’s key driver. Following the large GBP moves over last two days and limited risk premium priced in at this point, GBP now looks more vulnerable to negative surprise from the polls."

Perhaps the best bet is to stay out of the market, as advised by Adam Jepsen, Founder, of Financial Spreads who is are tying to remind investors that there is a risk of:

a) The UK voting to leave, and
b) The doomsayers being, to a degree, correct.

If, for the sake of argument, there's a 35% chance the UK will Leave and a 30% chance of the doomsayers being correct then there's currently a 10% of a prolonged downturn".

That's a big percentage and an inherent trade.

Jepsen argues that, in a way, it doesn't matter if there's a 10%, 30% or 50% chance of the doomsayers being correct.

"Therefore there is a risk on the table, says Jepsen. "This is another reason why I won't be trading the Referendum."