Market News & Insights
8 September 2014

Scottish Yes Vote Casts Doubt Over Pound

EUR/USD 1.2941
GBP/USD 1.6173
GBP/EUR 1.2497 (0.8002)
EUR/CHF 1.2061
GBP/CHF 1.5072
GBP/AUD 1.7285

The last three trading days have continued to provide markets with plenty of volatility to trade through, and plenty of risks to be avoided. Volatility took a boost from the ECB’s bazooka approach on Thursday which saw the EUR plummet to annual lows while labour market data from the US was weaker than expected. The big event in opening trading has been the massive gap lower in GBP crosses following polls suggesting the Scottish Yes vote for independence has taken poll position, rising concerns on the outcome resulting in a capital flight from the UK. In overnight trading stocks in the Asian session were mixed, while the JPY slid to its weakest level in almost six year against the USD following indications the economy is losing momentum. Thus far this morning GBP continues to be under selling pressure while UK equities are also well in the red.

GBP opened the week as much as 1% lower against some trading partners following YouGov/Sunday independent poll suggested the Yes vote has taken the lead, overturning the no vote which has held the majority for much of the campaign. Such a shift so close to the polls has resulted in a flight for safety from UK assets. The resulting uncertainty of a Scottish independence vote will have obvious concerns for investors, currency traders and interest rate traders alike.

The poll suggested 47% were in favour of Independence while 45% were against with 7% undecided. GBPUSD closed Friday above 1.6300 but by the time market traders took to their desks for the early open GBPUSD was trading below 1.6200, while EURGBP had jumped above .8000 from the low .7900’s. There is no doubt the ebb and flow of polling news will impact GBP crosses until the event on September 18th. Perhaps the adverse reaction in GBP crosses is based on the complacency that the no vote would prevail, uncertainties surrounding a plan B have driven the obvious capital flight and driven many to look to protect these against unknown risks at this stage.

Today’s economic calendar remains light on major data releases and the European session is likely to be looking at news flow from the UK for indications on risk appetite. The USD managed to hold its recent firm position despite Friday’s weaker than expected labour market report. The greenback was on the receiving end of some safe haven flows as the Eurozone looks towards further easing and uncertainty in the UK drives USD demand. Friday’s payroll figures fell to a weak 142k jobs added through August versus 230k expected, this flies in the face of most US data which has been on the firm side lately but US data just can’t seem to get a clean run. While in our regular summer market environment such a print would usually have sent the USD plummeting, we saw no such action on USD crosses. There was some selling of the greenback but overall the dollar has held its strength. US data remains light through much of the week, while we will continue to focus on Fed speakers for any indication on Fed rate hike policy.

The slide in the EUR continues and the ECB’s bazooka policy at Thursday’s meeting has certainly set the bar for easing expectations. The ECB continues to stick with their mantra to do whatever it takes and in terms of their forward guidance policy have yet to let markets down, if remaining slight ambiguous in the process, the door remains open for QE, we now have an indication on potential size, but first we have to see where Eurozone data leads us. We still expect no confirmation of actual QE until the TLTRO has been utilised and we also have full disclosure on bank stress tests. With that in mind CPI reading from Germany later in the week should set the tone, as will industrial production and employment data for the region.