With just three days to go before U.K. voters decide whether the country will remain part of the European Union, both the pound and the euro are rising on indications that the risk of a "Brexit" has retreated.
A poll-of-polls on Monday put the two sides neck-and-neck, after the "remain" camp regained ground following the shock murder of pro-EU lawmaker that triggered a three-day suspension in campaigning. The pound was recently up 1.98% against the dollar at $1.4642, having earlier hit the highest level in more than three weeks. The euro was recently up 0.47% against the dollar at $1.1330, near a two-week high.
So, right now, markets are betting on the nation voting to remain an EU member. But what happens if they are wrong?
While the long-term effects of a vote to leave the EU remain far from certain, there is unwavering unanimity within the financial world that a Brexit victory would hammer the pound and U.K. equity markets.
Capital Economics in London said on Friday that "a Brexit would still shock markets, even after the recent shift in the polls." It made the assessment before the tilt back towards "remain" following the murder of lawmaker Jo Cox, when polls pointed to a "leave" victory.
The analysts project that the pound could reach $1.20, which implies a fall of 17% from current levels of $1.46, while also stating that "major sovereign bonds would also see their yields tumble further, while global equities would probably take a hit too".
Morgan Stanley analysts offered a similarly message on Friday when they wrote to clients saying that they have increased their probability estimate of a Brexit to 45%, before going on to warn that investors should expect large moves in the pound whatever the weather.
The immediate impact of a Brexit on the pound has been a focal point of prognoses for weeks. But what has received less attention is the likely impact upon the euro and euro-denominated assets.
In a note emailed to clients on Friday, analysts at Jefferies said, " Ultimately, Brexit could be more of an issue for the rest of the EU, than the UK; the question is how quickly markets make that connection. We see signs that they are beginning to do so."
Despite the dire warning, Jefferies still predicts that the U.K. will vote to remain in the European Union on Thursday.
The analysts point toward "euro-zone financials and UK domestic sectors" as key swing areas on the day of the result. So in the event of a decision to leave the European Union, these areas could be the hardest hit but also the strongest performers if "remain" triumphs, according to the analysts.
The Jefferies analysts suggest that currency depreciation, in the wake of a Brexit vote, could help to push inflation higher and therefore boost growth in both the U.K. and the eurozone. However, they also imply that the medium-term economic effects of a Brexit are more difficult to model and could imply hardship for both the U.K. and the European Union.