Scottish elections to have a marginal impact on GBP as referendum is still years away – ING

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Scottish voters go to the polls this Thursday in what’s likely to mark another step in the push for a second referendum on independence. Regardless of the result, most don’t expect an imminent vote on independence. Economists at ING expect the impact of the Scottish elections on GBP to be very limited. 

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GBP currently trades cheap vs EUR, suggesting limited downside

“Although the Scottish election may bring back negative headline news about another Scottish independence referendum, we don’t think this should have an overly negative impact on sterling. This is because (a) a referendum could be years away rather than months (even if pro-independence parties win a majority; (b) as we observed with the Brexit referendum, the risk premium started to be built into GBP only six months ahead of the event; and (c) the first Scottish referendum in 2014 did not translate into a material build-up of GBP risk premium.”

“We note that the pound currently trades cheap vs the euro following the rather tough month of April for GBP. With GBP already screening cheap after its wobbles in April, this should add to the notion of a limited downside to the currency coming from possible negative headline news from the Scottish election.”

“The speculative positioning is the main technical vulnerability for GBP at this point. GBP is currently the biggest G10 FX speculative long as measured by the CFTC data. However, we have already seen some adjustment lower (from 21% of open interest in early March to 15% currently) and with the UK economy likely to see a meaningful recovery this quarter, we expect GBP to remain one of the biggest longs in the G10 FX space for now.”

 

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