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09/09/2014: A few thoughts on Sterling and the prospects for Scottish Independence


A week ago GBP/USD began the trading day above $1.6600. In the days since then, around 500 pips have been lost (more at its nadir) as investors have seen fit to take flight from sterling. Whilst not entirely (broad based dollar strength has also had a part to play), but the main reason has been that a series of polls have come out suggesting that Scotland could be close to voting for independence.

The considerable uncertainty that surrounds a split of the United Kingdom has caused investors to run for cover. What would happen to the currency? What of the Scottish banking sector? The impact on the UK trade balance. The political uncertainty surrounding the legitimacy of the 2015 General Election. There are a whole raft of issues but few answers at this stage. Banks such as Nomura are advising clients to cut exposure to the UK and brace for a collapse of sterling.

Polls in the last week have been getting closer. Starting with a YouGov poll on Tuesday 2nd September that showed 47% would vote “Yes” and 53% vote “No”, a poll in the Sunday Times put the “Yes” camp 51 vs 49 ahead. However, the latest “poll of polls” dated on 1st September (admittedly more than a week ago) by a professor at Strathclyde University showed the Unionists with a 10 point lead. Furthermore, these polling results do not factor in those undecided voters which appear set to be the deciding factor. It is also noticeable that the spread betters who are pricing in a likelihood of around 30% chance of a successful “Yes” vote.

Uncertainty is the bane of the investor and hence there is an overriding desire to sell sterling. The polls are just adding to the uncertainty, however the volatility may not be entirely one way and the volatility in Cable is unlikely to abate between now and that date of the Scottish Referendum on Thursday 18th September. As we get closer to the decision, more polls will be released and the volatility in Cable is likely to respond accordingly. The next 10 days is going to prove to be pretty eventful for Sterling.

Also, be careful of  running a position over the decision. If there is a “no” vote and Scotland decide to remain in the United Kingdom, then there surely have to be a sizeable rebound of  the big sell-off as the market has to price in stability (or what is left of it) once more.  So far there has been a 500 points decline that would need to be unwound.

There is little to gain from me forecasting what I believe might happen. However, I would hope that the closer it comes to the 18th September and the closer the two camps get in the polls, then people would hopefully realise the importance of the decision and think about it properly and not just on short-termist party political views. For that reason, despite the momentum that the “Yes” campaign appear to have, it is likely to go right down to the wire. Cable could be in for a rough ride.

Cable   09092014


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