UK will hold a referendum on June 23 to decide whether Britons want to stay in or leave the European Union. It is UBS base case for the UK to remain in the EU, so they still see a medium-term recovery of the pound, but expect volatility in the months ahead. Key Quotes “UK Prime Minister David Cameron agreed on a new deal for the UK's EU membership with his EU partners Friday. As a result, the UK will hold a referendum on EU membership on 23 June. After sealing the deal, Cameron promised that he will campaign with his ‘heart and soul’ for staying in the EU. However, a few political heavyweights, such as London Mayor Boris Johnson, have said they will campaign for the UK to leave the EU.” “The market reaction has been a 1.5% hit on the trade-weighted sterling index. As our base case is for the UK to remain in the EU, we still see a medium-term recovery of the pound, but expect volatility in the months ahead.” “In our view, the most crucial aspect of Cameron's deal with his EU partners is his satisfaction with it and his promise to campaign to remain in the EU. This was in line with our expectations and is important because we think he will be able to carry the majority of the undecided voters with him. The real surprise over the weekend was Johnson making public his decision to campaign for leaving the EU. As a well-known politician, Johnson could have an effect on some voters yet to decide.” “Overall, the next few months will likely remain tense and keep sterling in the spotlight. But given sterling's roughly 10% loss against the trade-weighted index since the beginning of December, we expect the downside risk to be limited. Our base case is for the UK to remain in the EU, and we expect the pound to recover following the referendum.” For more information, read our latest forex news.