Sterling slipped to a two-week low on Wednesday, while the cost of hedging against volatility over the next month rose to its highest since 2009, on worries that the campaign for Britain to leave the European Union was gaining the upper hand. Sterling has been weighed down since late last year by worries that a June 23 referendum on EU membership will lead to a "Brexit". Britain's hefty current account deficit - 7 percent of output in the last quarter of 2015 - makes the economy, and the currency, vulnerable to any pull-back in investment flows, feared if it votes to leave the 28-nation bloc.
While a YouGov poll published on Wednesday showed British voters evenly split between "Remain" and "Leave ahead of the ballot, two surveys the previous day - one online and one conducted via telephone - showed British voters had moved towards vote to leave the EU.
Bookmakers shortened their odds on a Brexit in response, with betting website Betfair putting the chances of a vote to leave at around 26 percent by Wednesday afternoon, having shown around a 17 percent chance last week after several polls put the "In" camp comfortably ahead. Sterling fell to $1.4405, its lowest in two weeks, leaving it down 0.6 percent on the day. "Two further Brexit polls have weighed on the pound, as the currency's sensitivity to these publications seemingly increases as the referendum date approaches," said currency broker XTB analyst David Cheetham.
Earlier, a slightly-better-than-expected monthly purchasing managers' index (PMI) for the manufacturing sector did nothing to lift the currency. It showed UK manufacturing activity barely grew last month, though at 50.1 it came in slightly higher than forecasts for a contraction.
"The failure to catch a bid on this morning's positive manufacturing data signals there could well be more downside for the currency in the run-up to the vote," added Cheetham. Against the euro, sterling fell 0.9 percent to 77.565 pence, its weakest since May 18. That also dragged it to a two-week low on a trade-weighted basis. One-month sterling/dollar implied volatility, derived from options that cover the June 23 referendum date, rose to 20.6 percent, its highest level since the depths of the global financial crisis in early 2009, and up from around 17 percent a day earlier.
The one-month euro/sterling implied volatility contract also rose to around 19 percent, also its highest since early 2009, according to Reuters data. "We expect the volatility in Cable (sterling/dollar) to continue rising in the coming days, given that polls just a few days before the vote may have a bigger market impact than they did previously," said IronFX analyst Sakis Paraskevov.
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