It’s judgment day for the United Kingdom. Investors worldwide are laser-focused on Scotland’s referendum and the impact the vote’s outcome will have on the British pound.
A "Yes" or "No" win cannot be guaranteed, but rest assured, the market will need to brace itself for some sharp sterling swings no matter the outcome. Rumor, innuendo, and early exit polls will be keeping global capital markets jumping throughout the day. Depending on the percentage outcome (smart money has heavily backed a "No" vote), the current tension will either subside a tad, or find fresh legs similar to Canada's awfully close Quebec referendum in 1995 that saw the separatists narrowly defeated by a mere 50.58% of the popular vote.
A resurgent U.S. dollar, and fear of the unknown in the U.K., has produced significant market volume and volatility. On that note, the trading of the pound picked up considerably in the first half of September. Last week, GBP plummeted to a new 10-month low (£1.6035) after a sudden surge in support for Scottish independence. However, with the unionist "No" side gaining a narrow edge in the polls this week, it has supported sterling and squeezed some of the weaker GBP short positions before the polls opened earlier today.
Whiplash Trading Styles Abound
No matter what, there remains a distinct uneasiness in the market. Those opposing separation are quietly confident, but it’s the spread between the "Yes" and "No" vote that will drive future volatility. Of course, even a sovereignty win will cause havoc, politically, socially, and economically for a long time to come, and with that, anywhere from 4.5% to 8% pound depreciation is conceivable. In all likelihood, a "No" vote cause sterling to bounce; how far will depend on the result spread. Current consensus estimates that the referendum has hurt the pound by about -2% outright, and in the very least, a "No" vote will unwind most of the damage done as GBP remains fundamentally a strong currency that has been unsettled by a nationalist situation.
There are many ifs, ands, and buts for a currency that may or may not be Scotland’s legal tender whatever the final outcome. For many, it has been an easy bet to sell the pound to wager on a sovereign outcome. Using the fixed-income or equity market to express similar thoughts has been inconclusive. Currently, U.K. interest rates are more beholden to the Federal Reserve's lower-for-longer pledge and the European Central Bank's whatever it takes analogy. Meanwhile, U.K stocks are focusing on financial equities that may or may not be based in Scotland in the foreseeable future. An inconclusive decision will only heighten future volatility. Investors require a resounding "No" vote to allow GBP to be fundamentally driven again, otherwise it's back to following the Quebec route: the issue gets to be repeated on every political agenda until it’s done to death.
A Braveheart Vote
Some unionists fret many Scots will vote with their hearts and not their heads. Yet even the optimists believe that without a Scottish Central Bank or independent financial system which will take time to implement, owning sterling is a safer bet in the medium- to longer-term, as GBP will eventually be recycled throughout the U.K. economy. However, many will also be wary of a surprise outcome. The U.K. has one of the biggest current-account deficits in Europe and it certainly requires capital inflow. Any small surprises will push the pound quickly toward a £1.50 handle.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.
