It’s a long time since Sterling gave up its place as the world’s leading currency to the US dollar, but it’s still the third most held reserve currency round the world and the fourth most traded on the currency markets, after the dollar, Euro and Yen. That means the performance of the pound can still have a big effect on financial markets, and thanks to the close links between the US and British economies that can have implications at home.
One reason to keep an eye on the pound right now is the upcoming Scottish independence referendum. On September 18 the residents of Scotland will vote on whether or not Scotland should stay part of the United Kingdom. For most of the two-year campaign it’s looked like the Unionist side had the result in the bag, but over the last few weeks the gap has narrowed dramatically and a vote for secession is now a very real possibility. Early last week polls actually showed the Yes camp in the lead and the result was an immediate fall in the value of Sterling. On Wednesday it hit a ten month low against the dollar, ending a healthy streak powered by continuing growth in the British economy.
Any idea that this was just a coincidence didn’t survive past Thursday, when new poll results showed those intending to vote No with a six-point lead. On the back of that news the pound climbed by 0.2 percent, not a huge rise but enough to get it clear of the low point and pull it up against a static Euro.
The implications of the news were felt outside the UK, as well. Spanish bond yields dipped on Wednesday and rose again after the more optimistic polls. Spain has its own restless regions, notably Catalonia, where the independence movement is a lot more popular than Scotland’s. If the north of Britain does strike out on its own that will raise the hopes of separatists in Spain, especially if Scotland gets a fast track to EU membership – which is exactly why Spain is certain to veto any such move.
The main reason for the currency jitters is that a vote for independence will instantly shrink the UK’s economy by up to 8 percent. In reality it’s likely to be less than that; Scotland has a disproportionately large financial sector and most of that would head south in the years between a Yes vote and independence becoming a reality. Still, a fall in GDP of around 6 percent is likely, and that’s bound to impact the currency. Uncertainty over what Scotland would use as its own currency also plays a part. Separatist leader Alex Salmond claims there will be a currency union between Scotland and the UK but that’s not going to happen, as all three main political parties and the Bank of England have made clear. The result could be Scotland using the pound unofficially, never something the markets like to see.
It’s possible the polls could swap ends again between now and Thursday, and if that happens the pound will fall once more. As it goes down equities will probably rise, so there could be some profits there for a bold investor. As for the long-term outcome, though, we’ll have to wait until September 19.