Poll putting Brexit camp ahead knocks back sterling

LONDON (Reuters) - Sterling handed back early morning gains on Tuesday after an opinion poll showed the “Out” campaign three points in front before June’s referendum on whether Britain should remain in the European Union.

A generic picture of a some British sterling money in coins and bank notes. REUTERS/Catherine Benson

Major banks have said the pound could lose around a fifth of its value if Britain votes to leave the EU on June 23, but exchange rates have priced in relatively little of that risk.

Derivatives pricing suggests hedging against an “Out” vote has been widespread, but betting markets show only a roughly 35 percent chance of a vote to leave.

The ICM poll was the latest to show the “Out” camp ahead or tied. Separately, IMF chief economist Maurice Obstfeld said the risk of Britain leaving was “very real” and a vote to quit would deal a damaging blow to the world economy.

“From what I can see, it shows the largest lead in an ICM poll so far, and people have clearly reacted to that,” said Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman in London.

“The general trend does seem to have been that support for Brexit has been increasing and if that continues to be the case as we get closer to the referendum, we should see more of a reaction on sterling.”

The pound traded 0.2 percent lower on the day at $1.4202 GBP=D4 and 79.90 pence per euro EURGBP=.

The loss came after Monday’s trading gave sterling its best day in a month against the trade-weighted basket of currencies used by the Bank of England to measure its strength.

A bigger-than-expected rise in some measures of inflation gave it another boost in morning trade on Tuesday, pushing it as high as $1.4315, its strongest since April 4.

“It is good to see sterling reacting to positive data, but given all the risks surrounding Brexit, we feel any rise in the pound is a good opportunity to establish fresh short positions,” said Petr Krpata, FX strategist at ING after the inflation data.

The pound has lost more than 7 percent this year on a trade-weighted basis =GBP and reached a 2 1/2-year low last week, on worries over the Brexit vote.

The pro-EU side says leaving the bloc would cause damage in a country with a trade deficit of 12 billion pounds, its widest in eight years, and a current account deficit that soared to 7 percent of GDP in the final quarter of 2015.

Data released by the Commodity Futures Trading Commission on Friday showed speculators had added to bets against the pound in the week to April 5 [IMM/FX].

British government bond futures lost as much as 60 ticks after the inflation numbers FLGcv1 before recovering some ground following the ICM poll. British 10-year yields GB10YT=RR rose to 1.46 percent, their highest in three weeks.

Additional reporting by Anirban Nag and David Milliken, editing by Larry King