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Sterling struggles on Scottish vote anxiety, eyes on ECB
September 4, 2014 / 9:03 AM / 3 years ago

Sterling struggles on Scottish vote anxiety, eyes on ECB

LONDON (Reuters) - Sterling hovered just above a seven-month low against the dollar on Thursday as jitters persisted about the potential impact of a vote by Scotland to split from the rest of the United Kingdom in a referendum in two weeks’ time.

A poll by YouGov on Monday showed the gap between the pro-independence “Yes” camp and those who intended to vote “No” in the Sept. 18 poll narrowing to just 6 points, prompting the first major bout of nerves around the issue in markets.

A note by Goldman Sachs on Wednesday warning of “severely negative” consequences in the event of “Yes” vote, including a possible “EMU-style currency crisis”, added to investors’ nerves. That prodded the pound down to $1.6440, the lowest since February.

Sterling stayed close to that low on Thursday ahead of a policy decision by the Bank of England, which is expected to keep interest rates at a record low of 0.5 percent.

Even upbeat UK data released on Wednesday showing the services sector expanding at the fastest pace in nearly a year, failed to boost the pound much.

“What’s really happened with sterling is that it’s suddenly smelt the coffee,” said David Bloom, global head of currency research at HSBC in London. “The YouGov poll came out and the market said: ‘We’ve priced nothing in’.”

“The risk stayed the same (after the poll) but the probability changed and hence the market got a bit of a fright, but I think it’s priced something in now.”

Steven Barrow, a currency and fixed income strategist at Standard Bank, asked in a note whether sterling could see a similar drop to when it fell out of the European exchange rate mechanism in September 1992 and saw a 10 percent devaluation.

“We doubt it would be this bad, but a quick 5 percent move, towards the high 0.80s for euro/sterling, is certainly possible and, with this, a move to the mid-1.50s against the dollar.”

ECB

The euro was flat against the pound at 79.885 pence ahead of an important European Central Bank policy decision and press conference later in the day.

The ECB is under pressure to boost inflation in the euro zone, which is currently languishing at 0.3 percent, but many said it was too soon to expect further monetary loosening. Speculation that quantitative easing - effectively the printing of money - could be introduced in the euro zone has been rife.

“Our team thinks it is too early for full QE,” said Chris Turner, head of currency strategy at ING, in a note.

“The market will, however, look out for ECB staff forecasts and any downward revision to the 1.4 percent 2016 CPI forecast could limit the fall-out from no QE news today.”

Editing by Catherine Evans

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