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British Pound Slides on Scottish Independence YES Vote Risks, What Happens Next?

Currencies / British Pound Sep 05, 2014 - 11:50 AM GMT

By: Nadeem_Walayat

Currencies

The British Pound has virtually nose dived after spending the whole of the year in an uptrend to recent multi-year highs of £/$1.72 of mid July on the back of a strong UK economy when compared to the Euro-zone catastrophe that continues to unfold across the English Channel, which had prompted much flight of the capital to the relative safety of the British currency.


Since early August, forex market attention has increasingly been turning towards the risks of a YES Vote in the Scottish Independence Referendum that risks blowing apart one of the few Islands of stability in a world of chaos. Up until recently it was assumed that Scotland would vote NO, but in the feverish build up to the September 18th vote, and the intensity of propaganda flying around has prompted much confusion as to the probable outcome of the vote which has prompted the forex markets to start discounting the likelihood of a YES vote that would trigger much flight of capital out of the UK.

However, as my series of articles on Scottish Independence have highlighted that the probability of a YES vote is very small, less than 25% as leaving aside the Scottish Fanatics, the vast majority of Scots, at least 75% realise the huge subsidy that England delivers them annually to stay within the Union, so will in all probability vote NO to contine to ride on the English subsidy gravy train.

What does this mean for the British Pound ?

With 13 days to go it is highly probable that the British Pound will continue to grind lower towards £1.60. However, a highly probable NO vote would trigger a sharp reversal in sterling that within a matter of a couple of weeks would recoup virtually all of the decline and head northwards in line with my long standing expectations for £/$ 1.80 by the end of 2014 that the British Pound had been relentlessly trending towards -

14 Feb 2014 - British Pound GBP Trend Forecast 2014

A quick look at the long-term GBP chart clearly shows a market that is breaking out of a multi-year trading range of between GBP 1.63 and 1.49. Therefore despite the Scottish Independence vote looking set to introduce much volatility during 2014, the over riding strength is such that GBP breaking above £/$1.80 before the end of 2014 appears highly probable.

Therefore sterling traders and investors need to immunise themselves against the bearish rhetoric that they will be subject to during 2014 in the run up to the Scottish Referendum, its aftermath and then the frenzy surrounding the General Election, all of which will be taken as cues for a weaker sterling when instead the reality will be one of sterling grinding its way ever higher to at least £/$ 1.80 this year as it continues to discount a strong UK economy and and outright Conservative election victory in May 2015 as illustrated below -

In terms of the British Pound forecast for the Scottish Referendum, it implies that -

1. A Scots No vote will dissipate Independence / UK breakup uncertainty for several decades.

2. A Scots Yes vote will result in an Independent Scotland having far LESS influence over Sterling than Scotland has today.

Both of these outcomes will tend to reinforce Sterling in terms of discounting a long-term trend for a more robust sterling economy.

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Source and comments: http://www.marketoracle.co.uk/Article47204.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2014 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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