If the imminent EU Referendum was a sporting event, it might just be the greatest sporting event ever.

There have been more punches thrown than in the rumble in the jungle. It’s lasted longer than a test match in cricket, swinging back and forth like an epic Federer v Nadal Wimbledon final, and as we enter the final furlong it’s still too close to call.

Irrespective of where you stand, the EU Referendum on the 23rd of June is potentially one of the most important events of our lifetime. The prospect of the Referendum has already had a profound effect on the Pound, weakening it dramatically and raising volatility to the highest levels since the financial crisis of 2008.

A changing landscape

Whether we remain an EU member state or choose to Brexit, the post Referendum political and economic landscape in the UK will have changed. Just as we are unsure about the result of the vote, so the aftermath seems equally difficult to foretell.

While facts are very hard to come by at the moment, it cannot be refuted that the prospect of Brexit has already been detrimental to the UK economy. UK GDP in Q1 revealed that growth slowed, inflation in May began to fall again and house prices are now rising at their slowest pace since 2012. Even if the country votes to Bremain, a look back at 2016 is likely to show a year with the economic hand brake on.

The depreciating Pound

Since the start of the year the Pound has been buffeted around by opinion polls. In March when Boris Johnson and Michael Gove pinned their colours to the Leave campaign’s mast and opinion polls narrowed, the Pound dropped to the lowest level in nine years against the US Dollar and

its weakest in two years against the Euro. In May, Sterling rallied, as opinion polls indicated that the Remain campaign had a 10 point lead over Leave.

This represented clear water between the camps for the first time in months, but as we hit the back straight at the start of June it was neck and neck. Markets don’t like uncertainty and that is evident in the Pound’s current value. Over the last week the Pound has fallen again as the polls now show Brexit marginally ahead.

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Entering the unknown

What a Brexit would mean for the UK is unknown. As for the multitude of questions it poses, there are very few – or certainly not enough – answers. Remaining in the EU would definitely create less uncertainty, hence the reason the Pound could depreciate even more if the nation votes to leave. Some forecasters believe that we could see the Pound depreciate by as much as another 20% if we were to leave the EU.

It is difficult not to speak in ‘ifs and buts’, but if we were to leave the EU, foreign direct investment in the UK is expected to fall, along with consumer and business confidence. Political upheaval is a given, as all the major political parties are in favour of remaining part of the EU. In the case of Scotland, it’s likely that they would seek another Referendum in order to stay.

So what if we don’t leave? Well, a lot of the factors mentioned above would be unlikely to happen. It may also not be the case that the Pound would strengthen back to the heights of 2015. A relief rally would be highly likely, but if the polls are as close in a week’s time, then possibly Sterling will weaken further ahead of the vote – as we saw with the Scottish Referendum and last year’s general election. The relief rally may only move rates back to where they are today.

Don’t get caught out

A month ago we warned of the rocky road to June the 23rd and suggested that companies and individuals should act defensively in light of the likely increase in volatility.

If anything, we have been taken aback by the scale of uncertainty to date. We would again advise that anyone with visible exposure to currency going into the end of the year looks seriously at hedging at least 50% of their risk. We can’t predict the outcome of this event but can surmise that a sharp swing in Sterling is highly likely and anyone who is not a professional poker player should not stake the house on a specific outcome.

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