As the weeks go on my prediction at the start of 2014 for 1.60 on GBP/USD before year end has suddenly come into sharp focus. I am going to revise that down further to 1.55. Why? A whole number of factors not least the Scottish independence vote to be held in 10 days’ time. As many of you will I’m sure have read over the weekend the ‘YES’ vote is now in the ascendency and has a 2 percentage point lead. Now, this ‘lead’ is tentative to say the least dependent on the particular poll you read however what can’t be argued is that the nationalists have clawed back a quite remarkable amount of ground in the past month. Is this a result of Salmond the orator or a weak campaign from the ‘better together’ vote? No matter what, an independent Scotland is now a real possibility and if you read the polls then dare I say it, the most likely outcome.Sentiment has as much a part to play in votes as they do in currency movements. With nine days to go and with the recent poll will the people of Scotland be swept along into ‘the time is now’ feeling or will the poll have shocked the ‘better together’ campaign into upping their efforts to keep the UK together? Regardless of the outcome of the vote in ten days’ time one thing the markets don’t like is uncertainty. Well, Sterling has and is going to get wheelbarrows of it over the next nine days. Should the independence vote be cast then who knows what that will do to Sterling? Answers on a postcard please. My point is, Sterling could drop substantially or nothing much might happen at all. I would however suggest you have a risk averse strategy in place if it is the former.
Will Scotland be allowed to keep Sterling and be part of a currency union? According to George Osborne, unequivocally not. What will this mean for companies in Scotland or for any clients that you deal with north of the border? There are so many variables that I believe it can only weigh on Sterling and hence push GBP lower short-term. GBP/USD is still at attractive levels however looking at it from a historical average perspective, so if you have a requirement to purchase USD I would suggest looking at covering off at least 50% of your exposure now.
As you’ve probably guessed from the above I only think GBP/USD is going one way. Down. I may of course be wrong on this and as some have suggested the move may already have been priced in and if there is a ‘NO’ vote then Cable may bounce higher. It is an unknown so it is best to be risk averse. Please contact myself or one of the trading team to discuss implementing a strategy for the remainder of September or out on a 3 month basis till year end. You may want to lock in a Forward Contract on a 1 month basis perhaps then regroup as it were and look at things again in October. This way, you have taken out the risk for the rest of September.
GBP/EUR? This is slightly harder to call. Sterling has taken a hit after the weekend headlines. However, as I have suggested the previous few weeks I think the EUR will become far weaker. Indeed, I suggested EUR/USD will be around 1.20 in 6 months’ time and this will drag GBP/EUR higher in the medium term. Short-term, GBP/EUR will be under pressure due to the impending Scottish vote in the UK. I would suggest market orders on GBP/EUR for the next few months to take advantage of any spikes in GBP/EUR. I think Draghi and the ECB will push the single currency lower and as I suggested last Monday I am sure you’ll hear various Government ‘officials/members/experts’ talking the currency down to get it to where they want it to be to stave off deflationary pressures. Draghi launched a package of measures to try and kick start the Eurozone recovery (I’m sure I have written the phrase ‘kickstart the Eurozone recovery’ at least 50 times in the past 6 years) that will ultimately lead to a full QE program.
We will have various data releases out this week however over the next nine days Sterling will be pushed left right up and down on the back of political statements, polls and general sentiment relating to the Scottish independence vote.
If you didn’t think the Scottish independence vote would affect you please now think of it as effecting you from a currency and FX perspective and ultimately a monetary perspective for your business.
If you have any questions or I/we can be of assistance please feel free to get in touch.
Written by Liam Alexander