Judgement day is almost upon the UK and the fate of the 300-year old union is uncertain as Scotland contemplates its independence on Thursday.
All of the patriotic and nationalistic propaganda from both sides has fired up voters ahead of the referendum, but which way will Scotland vote, and what impact will that have on the Pound Sterling exchange rate?
Scottish nationalists say that they will continue to use the British currency after independence, but the Bank of England has denied that as an option, stating that it would not be compatible with sovereignty. The pro-unionists, meanwhile, say that leaving the union will lead Scotland to economic ruin.
The markets are spooked, and nothing creates panic like uncertainty.
With opinion polls showing that Scotland’s vote will be too close to call, investor sentiment towards the UK and the Pound has waned in the run up to voting day.
As the day of reckoning draws closer, we at Future Currency Forecast look at the possible impacts of both a ‘Yes’ and ‘No’ victory on the Pound Sterling exchange rate as well as the wider implications for the British Isles.
Scotland’s Vote on Independence
The top four UK political parties all want Scotland to stay part of the United Kingdom, but due to the deep unpopularity of the Conservatives in Scotland, the fight to keep the nation united meant that the Scottish Labour Party was deemed the best option to fight for the ‘Better Together campaign’.
Meanwhile, the Scottish National Party, led by the well-known nationalist Alex Salmond, spear-headed the call for independence.
Calls for independence are nothing new with nationalists like Salmond, who has been rallying for a referendum for years.
However, the devolution of powers from Westminster to Holyrood under Tony Blair’s Labour government however made the vote a possibility. The SNP unexpectedly won a majority government in national elections in 2011 and used that victory as the perfect time to call for a referendum.
Why does Scotland want to leave the UK?
Scotland has a long and proud history of resistance and rivalry with England. The act of Union in 1707, which forged England, Scotland and Wales into the United Kingdom, is deemed by nationalists to have been the time when Scotland lost its independence.
The main issue the Scottish nationalists have with the union is that they feel that UK politics and business matters are focused too much upon the city of London and England in general.
Many Scots also say that the will of the Scottish people is widely ignored in UK elections; this is especially the case with the election of the deeply unpopular Conservative party (in particular Margaret Thatcher’s rule in the 1980s). The formation of the coalition government, which saw the Conservatives forced to collaborate with the Liberal Democrats in 2012, was also deeply unpopular.
The opposition in the ‘better together’ cite that Scotland is better and stronger as part of the United Kingdom. The UK emerged as the world’s most powerful nation in the 19th century and Scotland played a major role in the days of Empire and Industrial revolution. Pro unionists say that Scotland is also protected from the financial dangers of the unpredictable global economy and that the union provides jobs and security.
What happens if Scotland votes ‘Yes’?
If Scotland does vote to leave the UK on Thursday, the nation will be changed forever, for better or for worse remains to be seen.
A ‘Yes’ vote will have serious implications for each of the following issues; currency, politics, economy, society.
How will the Scottish Referendum impact the Pound Sterling exchange rate?
Over the past week, we have seen the Pound take a battering in the foreign exchange market and that is just because of one opinion poll suggesting a ‘Yes’ victory.
Economists are warning that a yes vote could lead to a mass devaluation of the currency as investors withdraw their funds from the country.
The markets hate uncertainty and with no answers being offered by Mr Salmond and his Scottish nationalists on issues such as what currency an independent Scotland would use, the markets are far from satisfied that a divorce from the UK will go smoothly.
A Scottish currency?
Economists have said that the most likely outcome is the creation of a Scottish currency, which will be pegged to Sterling, Scotland informally using the Pound is the second most likely option.
Another solution could be the introduction of a floating Scottish currency, while the least likely option would be a currency union with the rest of the UK, although UK political leaders and Bank of England Governor Mark Carney have previously ruled out such a proposition.
Political Impact
The implications for politics in Scotland and the wider UK will be changed forever in the event of a ‘Yes’ vote.
In the short term, Prime Minister David Cameron will no doubt come under heavy pressure to resign for losing the 300-year-old union on his watch.
The large number of Scottish Labour MPs will be forced to give up their positions in Westminster, thus potentially crippling Labour in the UK and perhaps opening the way for a Conservative majority government, as well as creating inroads for UKIP.
In Scotland, politics will likely, turn into a two party affair between the SNP and Scottish Labour parties.
Scotland would also have to reapply to become a member of NATO, the UN and EU and would lose its position at the top table in those organisations, which it enjoyed as part of the UK.
Economic Impact
With no currency plan announced it is hard to say what would happen to Scotland on that front.
The Pound however could devalue by as much as 10%, something that will heavily affect upon UK business. The uncertainty generated by a yes vote could also see the UK economy take a hit and could damage the nation’s economic recovery.
An interest rate rise could also be delayed as the Bank of England negotiates with Scotland over monetary issues such as national debt. With the SNP not giving away too much detail on its economic plans, the UK and Scottish governments will likely spend months hashing out deals. The lack of its own central bank will also prevent the nation from joining the Eurozone.
Social Impact
Scottish nationalists will get the independence they desire but relations between England and Scotland could be negatively affected forever, especially if any negotiations result in a raw deal for either side. Border checkpoints and passports would restrict movement from one nation to another and all other of civic documents would need to be changed.
The impact on jobs will also likely be negative for Scotland as businesses leave the country. With Scotland, being a socialist region the impacts and funding of the NHS and education systems would have to change as it is doubtful that a Scottish government could afford to run those without subsidies from England and Wales. It could also lead to independence calls from the Welsh and, perhaps, an English renaissance.
What happens if Scotland votes ‘No’?
A victory for the ‘No’ campaign would likely see the issue of Scottish independence cast aside for a generation but the issues will still remain, especially if the outcome is too close to call.
A ‘No’ win would, however, see the UK remain united and would likely see the country continue to strengthen economically.
How will a Scotland ‘No’ vote impact the Pound Sterling exchange rate?
A victory for the no campaign would likely see the Pound rally by as much as 5% against its major peers and see the confusion and concerns ease. Economists will likely revert to anticipating an interest rate rise by the Bank of England and expectations that the UK economy will improve.
Political Impacts
Not much is likely to change politics wise in the event of a no win but Scotland would receive more powers after the Conservative/Lib Dem coalition promised to grant the Scottish parliament more powers if they choose to remain a part of the UK. Friction could be created however as not all members of Westminster agree that the country should have the powers it currently has; let alone be given any extra powers, especially seeing as it tried to fracture the United Kingdom.
Alex Salmond would likely have to resign and a vote defeat could lead to the Labour Party beating the SNP in 2016s Scottish Parliamentary vote. If the vote is close then calls for independence are not likely to go away.
Economic Impact
The economy will likely continue much as it has done previously. With the uncertainty of the referendum out of the way, the UK economy will be able to continue to strengthen and improve without the threat of volatility.
Social Impact
Scotland will likely be divided between those who wanted independence and those who favoured the Union. Scot/Anglo relations are also expected to be negatively impacted due to the anti-English, anti-Scot rhetoric, which has been spouted over the past few months. Businesses will remain in Scotland due to the lack of uncertainty and jobs will be safeguarded at the nation’s shipyards and other UK industrial sites.
The above are just our views on what could happen, none of this is certain.
We do know, however, forecast that a ‘Yes’ vote from Scotland will send the Pound Sterling exchange rate lower against all of its major peers, whereas a ‘No’ vote is likely to offer support to the currency.
Update
Markets revert to pricing 90% in favour of NO vote
The Pound managed to recover the losses it sustained last week after economists increased their bets that the No campaign will emerge from Thursday’s vote as the victor.
Three polls published overnight showed that the anti-independence Better Together campaign was leading the Scottish nationalists by 52% to 42%. Despite that, the number of undecided voters is large enough to sway the vote’s outcome in either direction.
‘The market has gone back to 90% pricing in a no vote. On the day itself there are lots of factors that make it unpredictable,’ said a forex strategist from Deutsch Bank on Bloomberg Television’s ‘The Pulse’ programme.
With less than 24 hours to go before Scots, go to the polls the leaders of both campaigns have launched last ditch attempts to persuade the electorate. With the votes outcome seemingly going to be so close there are concerns that tensions could boil over in what has become an increasingly heated debate.
Update
Pound Sterling (GBP) Advances above 1.27 Against Euro (EUR), NO Favourite to Win
The Pound advanced above the 1.27 level against the Euro after the final opinion polls showed that No campaign is still on course to win the referendum. Sterling was also able to advance against the US Dollar and advanced against the majority of its most traded peers.
The final poll published by IPSOS MORI shows that the no vote on 53% and yes on 47%, in line with other recent predictions.
The poll, also found that 90% of Scots said they intended to vote today, with 57% saying they based their votes on hope more than fear.
To keep with all of the latest developments we are running a live blog through today’s trading session and Friday.
