With the FOMC meeting safely negotiated and out of the way, traders are now looking towards what could be an incredibly volatile period of trading. Scotland is voting on the option of independence from the UK and the result promises to be too close to call. The result could have huge ramifications for the UK and hence the potential for significant volatility. Any traders of sterling will need to have iron stomachs over the next 24 hours because it is going to be a rough ride as volatility could be enormous.
The polls close at 22:00BST, with the results filtering through just a few hours later. We will begin to hear from some of the smaller regions possibly around 03:00BST, but major cities such as Glasgow and Edinburgh will not be known until around 05:00BST, whilst apparently Aberdeen will be one of the final places to declare a result at 06:00BST. This means that the early European trading will be very early tomorrow as traders look to take advantage of the early results to give them a steer.
What are the implications of the results? Let’s start with the (relatively) simple one, a victory for “No”. In the near term a “No” vote should just result in Cable unwinding some of its recent weakness. The sharp sell off from just above $1.6600 was seen as the opinion polls began to tighten considerably. Expect this gap to close to a certain extent. The strength of the dollar in recent weeks suggests the immediate retracement will not be 100% but a significant rebound can be expected. On FTSE 100, once again there is likely to be a rebound, but I do not see it trumping the year to date high at 6905.
However the move may not be as pronounced as some would have you believe. The damage to the UK’s reputation from this increasingly divisive referendum could mean a serious hangover, and this may act to mute any potential rebounds even if the “No” camp wins, especially if the vote is close.
As for the more difficult to gauge “Yes” victory, the moves will be significantly pronounced as selling pressure sweeps across UK asset classes amid the massive uncertainty for the future in terms of politics, economics that come with the end of a 307 year union of states.
First off, Sterling will be, for want of a better word, hammered. Charts with their supports will become almost meaningless in this scenario, but the recent low of $1.6050 will not last long, whilst the November 2013 low at $1.5850 could also be tested. Some financial institutions have talked about 6% or 7% downside, some putting it over 10%. The truth is though, it is very difficult to gauge what impact a whole range of issues will have. The flight out of UK assets, potential credit downgrades, political upheaval and withdrawal of cash from UK banks, will all impact on the value of sterling. One thing that will be sure, trading over the next few weeks will be volatile.
A “Yes” vote would also have a bearish impact on the FTSE 100 tomorrow, however it would be relatively small compared to sterling. Around 70% of FTSE 100 revenue is generated overseas and this should insulate it from a dramatic a sustained move that sterling would see. Again, it is difficult to gauge, but the low seen just a few weeks ago at 6529 (c. 280 points down) is the first key support.
However, in line with the latest opinion polls (which point towards a slim victory for “No”, traders seem to already be pinning their pro-Unionist colours to the Cable mast. GBP/USD has now bounced 60 pips today, and is looking to retest the rebound high of $1.6357 that was hit prior to the FOMC announcement yesterday. There is good support intraday at $1.6250. A break above $1.6357 today would open the 61.8% Fibonacci retracement resistance of the $1.6644/$1.6050 decline at $1.6420.