Pound could retest 2010 lows if Scotland votes to leave UK If Scotland votes to exit the UK on September 18 the ramifications for GBP will be profound leaving the currency vulnerable to heightened volatility thanks to the ensuing uncertainty. Scotland only makes up about 10% of UK GDP, according to a study by the UK Parliament suggesting that its departure from the union would have a relatively muted impact on the economy and GBP. But thats not likely to be the case as is already being signalled by the Forex markets where GBP/USD has fallen from levels of 1.7192 seen in mid-July to below 1.6100 at the beginning of this week. In fact, GBP/USD could fall to 1.5000 and possibly even as far as 2010 lows of around 1.4400-4500 due to uncertainty, particularly if the break-up is acrimonious. That uncertainty would come down to how the two jurisdictions try to divvy up the assets and liabilities and the new economic realities the two would face. GBP is likely to oscillate depending on the twists and turns of the arguments over key economic questions. But looking at economic fundamentals, a UK minus Scotland is likely to be bad for GBP for the short- to medium-term for a number of key reasons: 1. Whilst the UK runs a large current account deficit, Scotland is a net exporter and therefore supports GBP. The UK current account deficit is currently 4.4%, having fallen back from 5.7% in Q4, 2013. Minus Scotland it could quickly soar to 6-7% – which would definitely undermine GBP. But there are some caveats, which will be explored shortly. 2. Scotland could renege on its share of UK government debt, which will see the rest of UK (UK) national debt to GDP ratio rise to 86% from 78% at the moment – a manageable increase, but hardly a positive for GBP or UK bond markets.
Posted on: Tue, 09 Sep 2014 16:09:51 +0000
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