British pound surges to 2016 high as Brexit fears subside

Currency rockets in value as traders bet on likelihood of Remain vote in the UK's referendum on European Union membership.

The pound slumped to a two-year low of $1.40 in mid-March. Chris Ratcliffe / Bloomberg
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The British pound hit its strongest level this year as voting took place in the United Kingdom’s referendum on its European Union membership.

Currency traders speculating that the UK would vote to remain in the EU pushed the pound to almost 1.49 against the US dollar (Dh5.47) late afternoon UAE time, which is marginally above where it started the year.

The pound’s value has swung back and forth this year as ­traders feared turmoil would ensue if Britons voted to leave the EU.

The pound slumped to a two-year low of $1.40 in mid-March. It had rallied by the time the campaign began on April 15, but fell back to $1.41 earlier this month as the Leave campaign took a marginal lead in the polls.

Simon Smith, the chief economist at London-based broker FX Pro, said that volatility in currency markets was to be expected because “there is a binary outcome from this vote”.

A recent analyst’s report from Citi had also predicted that there would be a surge of support for Remain during the final days of the campaign as polls began to show a lead for the Leave campaign in early June.

“Voter flirtation with political alternatives in the run-up to a referendum with a late swing to the status quo is a feature of this stage of the pre-referendum curve,” it said. “It is, in essence, a low-cost opportunity for voters to register their discontent with the status quo and with elites.”

Citi argued that voter turnout could have a crucial effect on the result, with a lower turnout likely to favour those wishing to leave the EU. Although higher numbers overall expressed a desire to remain, the percentage of voters who described themselves as certain to vote was higher among the Leave bloc.

Mr Smith said the trading levels for the pound were likely to differ dramatically depending on the outcome: “On remaining in, I could easily see sterling moving up $1.51-$1.52. On a Brexit, then my feeling is more towards the $1.30 level.”

The UK pound has not traded at $1.30 since the mid-1980s.

John Harvey, the head of FX strategy at Saxo Bank, said it was “impossible to tell” what would happen if Britain voted to leave the EU, but he expected markets to adjust fairly quickly.

“The longer-run issues for sterling remain regardless, notably the world’s worst structural deficit for a developed country at more than 5 per cent of GDP, so even a relief rally in sterling in the event of a remain could prove short-lived,” he said.