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Scottish Independence Fears Collapse the Pound

Posted by Joseph Trevisani on Sep 8, 2014 2:53:00 PM

It has been the worst six days for the pound sterling since the panic stricken days of the financial crisis in the fall of 2008.

Since September 1st the sterling has lost over 3.25 percent against the dollar. The worsening prospects for the U.K. economy have been compounded by economic stagnation in the EMU.

But it was the incipient fears of a dissolution of the United Kingdom that were jolted into life this weekend when a poll for the first time listed the independence vote leading in the Scottish referendum set for September 18th.

Most polls over the past several months have suggested that the Scots will choose to stay within the 307 year old union with England and Northern Ireland, but  the momentum of the vote seems to have moved  decidedly to the  independence side. The risk that the United Kingdom will dissolve is rising. 

For the markets and investors the issue is uncertainty. Huge questions remain on almost the entire range of financial and political questions for the separation of the two nations. Scottish nationalists have said they would like to use the pound sterling in a currency union with Britain, while U.K. Prime Minister David Cameron has said that will not be permitted. The division of debt would also be a contentious topic. 

London along with New York remains the globe's premier financial centers and the effect of disunion on banking and finance in the British capital might easily drive business to New York or European capitals. 

The Scottish National Party (SNP) and its leader Alex Salmond had planned to take an independent Scotland into the European Union and then adopt the euro. They claim to still want EU membership but the eurozone crisis has ended talk of joining the single currency.

The sterling had closed at 1.6327 on Friday but the news prompted a 134 point gap to 1.6193 on the open in Auckland and Sydney yesterday. Tokyo staged a minor recovery to 1.6233, leaving the opening gap unfilled but European traders commenced selling as soon as they came in driving the sterling to 1.6105 it lowest level since last November.

New York continued a late continental rebound to 1.6184, but never approached the opening rate of 1.6193. The top lasted no more than a few minutes with steady sales lasting the rest of the session relieved only by two minor 15 point rallies.

The New York low at 1.6099, just beating Europe’s, and the close at 1.6104 promise further weakness in the days ahead.  

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

1min sept8 1
gbpsept8 2

 

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