News & Analysis

Should I stay or should I go? Scottish vote anticipation gives Pound a drubbing

Andrew Saks, Wednesday, 28 April 2021

There is nothing like an old fashioned bout of political hand-wringing when it comes to the exercising of trepidation in the FX markets.

A number of analysts began their day this morning in London by taking a somewhat cautious view on the British Pound's potential performance against the Euro and US Dollar as mid-week apprehension is being displayed in the advent of next week's Scottish election.

As April draws to a close, many Tier 1 bank FX risk managers - in non-corporate speak these people are the ones who set out trading strategies at the highest level of FX dealing within the market-making departments of major investment banks with the highest market share in FX by volume - are looking at how the end of April is likely to look, rather than just at today's movements.

The consensus among some City of London professionals is that the Britsh Pound's relatively stale performance of late which has followed a long period of rising values against the Euro and Dollar could be attributed to the potential outcome of the vote in Scotland which is set to take place on May 6.

Unlike the drubbing which was administered to the pro-independence, pro-EU membership and staunchly socialist Scottish nationalist parties during Scotland's referendum in which the country's population was given a chance to decide whether Scotland remains part of the United Kingdom or becomes a completely independent nation, this time there is speculation that pro-independence parties may create a loud enough racket for the British government to grant another referendum on whether Scotland could go it alone.

As we noted in the middle of April, Scotland's future as a wholly independent nation or as part of the United Kingdom could be either a contributor to the demise of the British pound's high value dominance, or it could cause its value to rise even higher.

After all, Scotland's economy is considerably different to that which lies south of the border in England.

By contrast to England's highly diversified economic and commercial structure which comprises a combination of large corporations, small private businesses and varying business sectors from London's global financial powerhouse across Birmingham's automotive manufacturing to Bristol's telecommunications and aeronautical technology and Cambridge's science, medical technology and acoustic audio research to name just a few, Scotland has an oil-dependent local economy with a large number of citizens on low income in its cities.

Should Scotland go it alone, and oil continue to decline in value due to renewable energy and electric vehicle use increasing globally, England's bill to prop it up would reduce, for example.

This morning, NatWest Markets, the interbank FX prime brokerage and investment banking division of RBS, one of the world's largest banks, said that the FX division of the company has reduced exposure to the Pound as any result of the election could pose questions on the long-term viability of the United Kingdom.

"It’s about event risk and long Sterling positioning" said Paul Robson, Head of G10 FX Strategy at NatWest Markets.

Socialism and prosperity never go together, and Nicola Sturgeon of the left-wing Scottish National Party is on course to win the election, however there are still some doubts as to whether the socialist, pro-independence party will actually gain its expected majority when it comes to people putting their mark on the ballot paper.

During the advent of the independence referendum a few years ago, it was expected by both English and Scottish observers that the people would vote in favor of an independent Scotland, however when it came down to voting, the vast majority did not want independence from the United Kingdom.

Past events are not always an absolute indicator of the future, but that scenario is definitely a consideration, reflected in the value of the Pound today which is stagnant at 1.39 against the US Dollar and a low 1.15 against the Euro compared to 1.21 yesterday.


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