FX Insights:Brexit polling fatigue?

Brexit is one of the known “uncertainties” driving markets in 2016, but it is not the only factor affecting GBP. Our beta sensitivity analysis shows that the Brexit probability has recently had less impact on GBP/USD. Instead, risk sentiment has been the dominant driver of GBP/USD. The currency’s sensitivity to risk has doubled while its Brexit sensitivity has fallen a similar amount.

    Risk sentiment since the start of May looks to be fulfilling the “sell in May and go away” seasonality that has been prevalent since 2010. But even outside of that there are warning signs that the UK economy is in a slowdown, with the BoE unlikely to turn hawkish anytime soon. Retail sales, jobless claims and PMIs all have disappointed expectations, and so do not offer a good reason to become bullish on GBP.

    Closer to the referendum in June, market focus will likely return to the state of polling as the results continue to show high levels of uncertainty. There remains a significant difference between online and telephone polling results. Telephone polls over the last few weeks have shown lower levels of Brexit support, which has seen GBP rally and implied vols fall. Online polls since then have shown higher levels of Brexit support. However, GBP overall ignored them.

    This “polling fatigue” is a similar pattern to what we saw in the run-up to the Scottish referendum, when the market reacted strongly to the first few polls in the weeks before the referendum, but then reacted less to subsequent polls. It doesn’t mean that the polls will be completely ignored, but the market will likely only react to a trend rather than each individual poll result. Moreover, the market doesn’t appear to correctly differentiate between the trends in telephone and online polling. For example, recent telephone Brexit support levels were within the range of previous releases and so not a material change in the level of Brexit support, yet the market initially reacted to it.