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Brexit — Game on, watch out

Immediately after the date for Britain's referendum on European Union membership was set in February, the pound weakened toward a 2016 low of 1.385 against the U.S. dollar.

For most of the time since then the "stay" camp has performed best, and sterling has strengthened accordingly, to a high of 1.473 in late May. However, the last week has seen a marked change in momentum, with the "leave" camp gaining some much needed traction.

Four polls in the last week have shown a swing toward "leave," and markets, which perhaps had been complacent about a "stay" vote, have moved accordingly. Peak to trough this week, sterling fell 2 percent. Betting markets have also narrowed, while the latest Financial Times Poll of Polls suggests 46 percent for "stay" vs. 43 percent for "leave" — the 3-point gap is the closest it has been since February.

Guests wearing pro-Brexit t-shirts arrive for the premiere of "Brexit: The Movie" in London.

Tina Fordham, Citi's chief global political strategist, writes Thursday morning: "We continue to maintain a 30 to 40 percent probability of Brexit, but are increasingly concerned about the implications of continued closeness in the polls, erratic polling results, and growing rancor within the Conservative Party for post-Referendum domestic political stability."

The erratic polling results are important. This is not a vote down traditional party lines. The Conservative Party is hugely divided, while as much as a third of Labour Party voters could vote "leave."

Perhaps more importantly, in a referendum — as opposed to an election — the whole nation becomes a single geographic voting area, rather than 650 separate voting constituencies. So making traditional predictions based on small geographic strongholds always going to one party or the other is not possible. This vote is hard to predict, and with three weeks to go before the June 23 vote, markets are waking up to that fact.

"Leave's" initial momentum from February through most of May came because of a tactic dubbed "Project Fear." It has been widely known that turnout among "leave" voters would be very high — this in the once-in-a-lifetime opportunity they have been waiting for.

Prime Minister David Cameron, who votes "stay," and his team need to make certain that enough people who support staying do in fact vote. He and George Osborne, who also votes "stay," have tackled this by making all sorts of scary forecasts about what an Brexit would mean for the U.K. economy. Their arguments appear to have been backed up by credible individuals such as Bank of England Governor Mark Carney, International Monetary Fund chief Christine Lagarde, and, most recently this week, by the Organisation for Economic Co-operation and Development. The tactic appeared to be working.

However, in the last week, "leave" has fought back. The main catalyst is immigration. Boris Johnson, who votes "leave," leaped on official statistics that show net migration into the U.K. increased by 20,000 to 333,000 in 2015 — far above the limit of "tens of thousands" of inflows that Cameron once promised.

Some also argue that "Project Fear" went too far, and that Cameron and Osborne lost some credibility. This was highlighted Thursday morning by Labour leader Jeremy Corbyn, who in a speech aimed at encouraging people to vote to stay found time to be critical of Osborne.

"Just over a week ago, George Osborne claimed that the British economy would enter a year-long recession if we voted to leave." He added: "The biggest risk of recession in this country is from a Conservative Government that is failing." Corbyn was also critical of the Transatlantic Trade and Investment Partnership.

The polls and betting markets still give "stay" a significant lead, but the one-way tide that "stay" had enjoyed for most of the spring has been shaken up over the last week. This vote will be close and unpredictable, and markets — not just in the U.K. but Europe and perhaps further afield, too — need to wake up to that fact.