Market Report – Scotland vote weighs heavily on the Pound

9 September, 2014

Tom Arnold

The Pound has not been in a very good place for the last few weeks, with the incredibly positive momentum of the last few months coming to an abrupt stop and in fact changing to a complete turnaround to what some market analysts are describing as “being in freefall”. This is a little over the top, as the Pound is still holding up fairly well, other than against the rampant US Dollar. Against the Dollar you really could use words like freefall with an overall movement of approximately 12 cents in just a few weeks.

The main reason for the overall negativity towards the Pound has been the ever shifting stance by the Bank of England on interest rates. The markets view much of Sterling’s strength as being supported by the expectations of UK interest rate rises in the coming months and governor Carney’s lack of specificity as to when these will exactly start has caused much of the uncertainty for the Pound. Coupled with some less than exciting data releases this has seen the Pound drop away across the board.

The Euro is still struggling though as economic recovery seems far away, and interest rate cuts take their toll, leaving the Dollar as the only major with any really positive sentiment and hence it has been making hay.

We then come back to the Pound… Yesterday morning saw a dramatic collapse following the first opinion poll to show that the Scottish referendum Yes campaign had taken the lead. The markets really don’t think independence is a good idea for Scotland, or the remainder of the UK, and especially the Pound. The overall uncertainty of what a Yes vote actually means – even Alex Salmond has admitted he as yet does not actually know what will happen if it comes to pass – is absolutely horrible for Sterling’s outlook.

One of the major questions still to be effectively answered is will Scotland retain the Pound if they become independent? Westminster says No, Holyrood says Yes, everyone else says you don’t know because no one actually understands what independence means. The reality is a Yes vote really means opening the door on a massive amount of negotiations, which could take years, surrounding a Westminster general election, which would also add significant uncertainty and issues – half the negotiators could suddenly be replaced, half way through negotiations!?

All in all a massive amount of uncertainty and downright negativity towards the Pound, which even the hopes of interest rate rises can’t battle back against – Mark Carney is presumably waiting to see what happens with the referendum himself before making further decisions on the timing of his next moves – so even more uncertainty. We did get some respite and some Sterling recovery once Gordon Brown laid out his plans for some additional powers for the Scottish Parliament in the event of a No vote, but with the SNP describing this as a reaction caused by “absolute panic”, it may well be a case of too little too late.

There is plenty of data out today including UK industrial and manufacturing numbers and a UK GDP estimate. Governor Carney is also speaking in Liverpool. If any of these numbers come out particularly positively then Sterling could make some short term gains but the spectre of the Scottish vote is still likely to be the main focus of the markets. Make sure you stay in close contact with your CI account manager to be kept fully informed of what is happening and how it is likely to affect your upcoming currency purchase.