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Any post-referendum sterling rally to be short-lived

Brexit worries have been driving sterling lower so far this year. Accordingly, a vote to “remain” in June’s EU referendum should see the pound rebound. But we think any strength is unlikely to be sustained, as monetary policy tightens even faster in the US than the UK relative to expectations. Meanwhile, there’s less evidence that UK equities and gilts have been reacting to Brexit fears, so the implications of a “remain” vote should be limited. Even if the vote is to leave, we doubt that the impact on equities would be too large, as a sharp fall in sterling should help to offset any deterioration in sentiment. Further ahead, rising commodity prices and domestic profitability should support UK equities regardless of the referendum outcome. We expect gilt yields to rise too, as markets are currently underestimating the extent to which inflation and interest rates are likely to rise over the next few years.

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