British pound hits 6-month high

Sterling continues to surge on the back of growing expectations Britain will remain in the EU.

The British pound was up again on Thursday as Asian markets began trading, in a flurry of last-minute betting activity before a landmark UK referendum on whether to stay in the European Union. Against the US dollar, the pound touched a six-month high of $US1.4847, a 3.4 per cent gain for the week so far.

The pound has been surging this week, catalysed by polls showing a slight lead for the “remain” side that opened up after the killing of pro-EU British lawmaker Jo Cox that some believe has tilted fence-sitters toward a pro-EU vote.

This sets up the pound for a number of scenarios, and possibly much volatility.

While the odds favor a pro-EU vote, there is a risk of “buy on the rumor, sell on the fact,” which could temporarily sink the pound against the dollar after the referendum, even if voters choose to remain.

Analysts project the pound would crater if Britons vote to exit, likely surrendering all of its recent gains and more. The pound could collapse below the psychological support level of $US1.4000, triggering preset trading orders that would accelerate the fall.

There are also longer-term implications.

Victor Yong, interest rates strategist for United Overseas Bank in Singapore, said that if the UK were to exit, the Bank of England might cut its base interest rate from the current record low of 0.50 per cent -- potentially to zero, possibly within days, or weeks at most.

Given the urgency of the situation, the BOE would likely act quickly, though its first priority would be to ensure interbank funding liquidity doesn’t dry up. In the event of an exit vote, banks might refuse to lend to each other out of fear that other banks’ creditworthiness will be undermined by diminished access to European markets and rising UK defaults.

The BOE has already laid out arrangements with other global central banks to pump cash into markets to prevent a freezing of the financial system, Mr Yong said.

The central bank’s bias would certainly shift toward an easing policy, he added, but a zero interest-rate policy might prove too radical given the recent debate about its effectiveness. A 25 basis-point cut combined with an asset purchase program might be announced to buffer a Brexit shock on the UK economy, Mr Yong said.

On the other hand, if the UK remains in the EU, gradually improving economic data might persuade the BOE to lift interest rates in 2017, following the path of the US Federal Reserve, he added.

Dow Jones newswires