Forex Fundamentals – UK, the Pound and Scotland

September 3, 2014

It’s not an everyday sight when Scotland has more influence over the GBPUSD exchange rate. Yet another proof Forex fundamentals change.

Forex Fundamentals

When the Construction PMI came out this week, the pound continued its decline against the USD. Even though the data was very good (64 vs 61.5 expected).

The reason why the pound loses ground comes from Scottland. The Scottish independence referendum is a hot topic. It will take place on September 18. And the latest polls show the votes are very close to 50/50. But why it is bad for GBP?

Interpreting Forex Fundamentals in the New Context

The problem lies in the fact that Scotland has two options how to deal with this situation. Moreover, the third option is to introduce a new currency. Together with its own central bank. But let’s focus on the 2 options to use the Pound.

Option no 1 - Scotland keeps the pound as an official currency creating a union with Britain. It may seem to be easy. But it is a rather complex situation.

This is a political decision and currently, Britain is not interested in it. To establish a healthy currency union all sides must operate in a similar way.

Moreover, their fiscal policies must relate to making this thing work. But this may not suit Scotland. They would o give up a sizeable portion of their independence on government spendings. Plus, numerous other things. So, it raises a question: why declare independence in the first place if the very next thing you do, is to give it away again?

Option no 2 - Scotland keeps the pound as an official currency without British government's consent

That would be unfavorable to Scotland. The country would operate with a currency that is controlled by another country. And, by another central bank.

Which does not take into account their economic situation! For example, Britain’s economy starts to slow down and BOE decides to launch a QE program. But in the same time, Scotland has a real estate boom, so the last thing they would need is excess liquidity. That's pure and simple Forex fundamentals interpretation.

Conclusion

There are many unanswered questions. And, uncertainty.

That is one of the reasons why the pound loses ground against the USD.

Capital Properties FX
September 3, 2014

Capital Properties FX