Even the biggest currency traders and market experts didn’t expect such a monumental occurrence to sneak up on them, but that is exactly what has happened. A Scottish referendum scheduled this week, which was just supposed to be the formal approval of Scotland’s continued participation in the United Kingdom, has suddenly and quickly turned into a nightmare for British politicians. The Scots, in a surge of national pride and patriotism, may finally be voting Yes for independence.
Good for them, but not so good for investors, as this is a turn of events they did not foresee. Political turmoil in the Middle East and in the Ukraine has become the order of the day, but certainly not in the United Kingdom. And the reaction in markets? Brutal. The Pound Sterling was dropped by investors like a hot potato, a ticking time bomb, if you will. The currency opened the trading week at 1.623, a gap to the downside from the 1.63 level where it closed for the weekend. The Pound Sterling’s volatility surged to its highest level since the British government was forced to rescue the Royal Bank of Scotland.
Why is the Sterling under such heavy selling?
So what is making investors sell the Sterling so aggressively? Primarily, it’s the potential aftermath in the event of a Yes vote on Scottish independence. The main question is will Scotland stay with the Sterling? So far, British officials refuse to contemplate such an option.
And what will happen to the UK’s debt? Will Scotland take a proportional share of the existing debt onto its new sovereign entity? Or will the Scottish government try to write it off, likely resulting in a serious row with the UK government?
And what of the oil rigs in the Scottish sea? Britain’s North Sea oil rigs? Will they be brought under Scotland’s control? How will the Scottish banking system be handled if it’s not interconnected as one system with the BoE? How will it affect UK banks?
All are important burning questions of massive proportions that can only be tackled after the vote, which is why investors just aren’t willing to take a chance on the GBP at the moment.
Implications for the Sterling
Although the Sterling is not suffering a total collapse, undoubtedly the bears are currently in the driver’s seat. As we get closer to the vote, any traction for a Yes vote on Scottish independence is likely to intensify the selling pressure on the Pound Sterling, especially vs its American peer, the USD. Once the vote takes place, a Yes vote could produce further pressure, but may eventually prove to be something less of a catastrophe than initially believed and as negotiations progress, investors might get a positive surprise and a Sterling rebound. A No vote will obviously create an immediate rebound with 1.64 possibly revisited. However, until then, as the bearish buildup intensifies, the 1.59 seems to be on the bears’ radar.
Original Arti9cle Written By: Abby Tsype