In Light of the Scotland Independence Referendum in the UK

By HY Markets Forex Blog

The latest poll in the YES/NO campaign for Scottish Independence showed, for the first time, that the YES campaign in favour of Scottish Independence is marginally ahead.  The data has dragged the UK benchmark index FTSE 100 and the British pound lower.

The move has raised worries and speculation on how it would affect the pound sterling if the Scottish nation should succeed in their bid for a separation from the UK?

According to the Bank of America Merrill Lynch, sterling could lose value in the event of a Yes vote and could weaken the British Pound (GBP) against the USD in 2014 and 2015.

On the other hand, analyst Athanasios Vamvakidis says he projects downside risks for the pound sterling if the Scottish referendum succeeds.

“The Scotland referendum is a downside short-term risk to our GBP projections in 2014, particularly if long GBP positions increase further in the meantime and the referendum polls become more inconclusive, triggering market concerns,” Vamvakidis said.

However, if the Scotland votes No then pound sterling valuations will remain unchanged, but if there is an event of a Yes vote there are a number of currency-specific scenario to expect according to the Bank of America.

• The UK current account balance would worsen due to the loss in oil exports, which would partly balance by a current account surplus with Scotland.
• A Yes vote could result in dependent liabilities for the continuing UK, even with the final currency arrangements, such contingent liabilities, the BofA have argued it will take time to gather all the details.
• Somewhat, lower CPI inflation could allow a looser monetary policy.
• The GBP is currently driven primarily by the strong UK data, with a Yes vote, the BoE is expected to be the first major central bank to cut rates early next year.
• The debt ratio for the continuing UK is expected to slightly increase in the short term, under certain scenarios. With such an increase and a high debt-to-GBP ratio, it could lead to higher fiscal risks and a tighter fiscal policy.

Investors concerns continue to weaken the GBP before the referendum, but GBP could strengthen at a slower pace after the result even if Scotland votes for independence.

The campaign is still a long way but plays an enormous role for both sides and the financial markets have yet to weigh in. Whatever the long term prospects for Scotland and the continuing UK, both could pay a steep economic price during the coming months or years.

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