With less than six weeks to the UK's EU referendum, both the 'remain' and 'leave' campaigns seem to have shifted gears as we have now entered a crucial phase.
Yesterday, the BoE repeated it is sidelined until after the referendum. The bank reiterated that a Brexit 'could materially affect the outlook for output and inflation' and Carney even said that the UK probably faces a recession in the short term - see our Bank of England Review . Today, the IMF also warned about the economic consequences of Brexit.
Cameron said this week there is no guarantee for 'peace and stability' in Europe in the event of Brexit, but Boris Johnson dismissed this claim. Johnson also said the EU/UK deal contains no real changes, e.g. that the UK still cannot control immigration.
On Sunday, chancellor George Osborne said that Brexit could result in lower house prices and higher borrowing costs for home owners. A new HM Treasury report on the short-term effects of Brexit on the housing market is to be published in the next few weeks. Justice Secretary Michael Gove has rejected the idea that the UK would be 'punished' for leaving the EU.
Opinion polls are still mixed but according to betting odds, 'remain' is still the most likely outcome. That being said, the probability of Brexit has increased according to betting odds. In the last ICM poll, both camps had 41% but looking only at people 'certain to vote' then the leave camp had 46% of the votes, 2pp ahead of the remain camp as its supporters are less likely to actually vote.
According to our Brexit risk premium monitor, the risk premium on EUR/GBP has declined from 4pp to 2pp in recent weeks. The decline in the risk premium follows the series of weak UK data and a decline in the 2Y UK swap interest rate which justifies a weaker GBP. In the FX option market, the risk premium seems to have picked up somewhat again this week.
What to watch next week
The labour market report for March is due on Wednesday and if the employment print is weak, it will be clear that the labour market has slowed.
The State Opening of Parliament including the Queen's Speech is on Wednesday. The market's focus will be on any comments/debate on the upcoming referendum.
To read the entire report Please click on the pdf File Below