Pound Sterling's Next Battle Looms as Scottish Independence Beckons

Scottish indepenence and Sterling

Image © Adobe Images

The British Pound has endured years of underperformance - valued well below fair-value - thanks to political and medical upheaval, specifically the 2016 EU referendum result, ensuing Brexit negotiations and the onset of the covid-19 crisis in 2020.

Economists are however looking for the covid-19 crisis to end with the release of a vaccine, while Brexit talks appear to be entering their final straight with UK and EU leaders almost certain to enter a tunnel phase of intense bartering that should see a deal delivered by around about the end of November.

The positive developments could combine to mean Sterling ends the year trending higher and closing the gap on fair-value.

However, expectations for a long-term appreciation in Sterling might be dashed against the rocks by another storm brewing on the horizon for Sterling: Scottish independence.

The issue gained prominence on Thursday after polling company Ipsos MORI revealed support for independence in Scotland had reached its highest level on record, with a whopping 58% of Scots who are likely to vote saying they are inclined to take their country out of the UK if they were asked to vote today.

Support for independence

Scottish independence matters for the Pound, with the 2014 referendum resulting in the Pound falling as it absorbed a risk-premium in anticipation of a potential vote for independence, with declines accelerating in response to some polls that suggested the outcome would be close.

The currency recovered following a result in favour of the status quo.

Market expectations heading into the 2014 vote reflected expectations for Scotland to vote to stay in the UK. A second independence referendum would however see markets price in the break up of the UK based on a clear trend in polls during 2020 that favour independence, suggesting a much greater premium for Sterling to absorb.

FX transfers: Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more. (Advertisement).

In short, there would likely be notable downside in Sterling if a referendum were to be called, with that weakness accelerating on confirmation that the independence movement has ultimately won.

While the UK government has rejected a new referendum the pressure will only grow over coming months as the Scottish National Party look set to secure another sizeable majority in Holyrood elections in 2021. They will argue such a win presents a clear mandate for another referendum, and it could be difficult for the UK government to justify refusal.

The Ipsos MORI poll reveals the SNP currently has a very strong lead in voting intention for both constituency and list votes in next May’s Scottish Parliament elections, with the Conservatives in second place.

The constituency vote:

SNP: 58%
Scottish Conservatives: 19%
Scottish Labour: 13%
Scottish Liberal Democrats: 8%
Other: 2%

The regional vote:

SNP: 47%
Scottish Conservatives: 19%
Scottish Labour: 13%
Scottish Green Party: 9%
Scottish Liberal Democrats: 8%
Other: 3%

The same poll also shows most Scots are leaning towards a need for another vote with 64% of respondents saying the UK Government should allow another independence referendum to be held within the next five years if the SNP wins a majority of seats in the 2021 Scottish Parliament elections.

A third say that the UK Government should not allow this.

Reasons for indepedence

Most respondents cited political divergence with their southern neighbours and a lack of faith in Westminster as a reason for Scotland to become independent.

When it comes to the economy 52% say Scotland's economy will be stronger outside of the UK in the longer-term.


Pips offer