This week in the markets: Scottish independence ‘no’ vote


The pound was depressed early in the week thanks to uncertainty over the outcome of the Scottish vote, with GBP/USD dropping below 1.62 on Tuesday. All the main Westminster political parties pledged more powers to Scotland, with the Daily Record running a front page article signed by David Cameron, Ed Miliband and Nick Clegg with the headline “The Vow.” The pound pushed higher on Thursday as the Scottish vote neared, and has continued to rise slowly since the ‘no’ vote came in on Friday morning.  The GBP/USD pair has traded to a high of 1.6515 so far and opened this morning at 1.6465.

On Wednesday, there had been a lot of volatility in the pound, with sharp moves in GBP/USD during the London and New York sessions. The CPI figure from the UK was released and fell, as expected, from 1.6% to 1.5%. Although the fall in inflation was expected, cable fell below 1.62 to as low as 1.6172 immediately after the release, which brought the lowest inflation reading in the UK since 2009 and will play into the hands of the doves in the MPC, who are keen to keep interest rates lower for longer. Cable managed to get above the 1.62 handle in the afternoon on Wednesday, then jumped dramatically, briefly breaking 1.63 as the London session came to an end as the dollar was sold off ahead of the US FOMC statement.

By Alex Edwards at OFX, an international money transfer service

The dollar rallied on news that the Fed had shifted its path for a rate hike, sometime around mid-2015. The reaction to this suggests that the market is eager to be long USD. The reading of the statement appeared to be dovish, but the reaction would suggest that the market had a hawkish takeaway. What we can derive is that an interest rate hike will be heavily tied to domestic data, the labour market is underutilized, inflation is still lagging and wage growth is behind target.

With regards to the euro, last week saw the closely-followed monthly German ZEW Economic Sentiment survey fall for the eighth consecutive month. The reading fell from 8.6 to 6.9 as tensions in Ukraine, low inflation and the economic slow-down weigh heavily on business confidence in the eurozone. Although the fall was less than expected, the reading is the lowest since 2012.  In other news, the ECB announced that it would be making €400 available for TLTROs (targeted long-term refinancing operations) – in other words, making cheap loans available to banks.  It received a fairly lukewarm reception and so gains in EUR/USD have been limited, and the pair remains under 1.30.

Still, the main event of the week was Scotland’s vote.  The markets haven’t seen a huge reaction, as a ‘no’ vote was being busily priced in on Thursday, but there’s still room for further appreciation in cable over coming weeks as attention re-focuses back on economic data, Bank of England policy and the possibility for further divergence between Fed, ECB and BoE monetary policy.

More: GBP/USD and GBP/JPY Post Referendum Elliott Wave Analysis

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