A new source of concern for investors over the longer-term relates to Scotland and the potential breakup of the United Kingdom.
“The state of the union in the UK is again in the spotlight after an opinion poll indicated that Scotland is favouring independence. Not only did Scotland vote to remain in the EU in the 2016 referendum but First Minister and Leader of the SNP Sturgeon is seen as having performed better than Johnson through the Covid-19 crisis. The SNP is expected to perform well in the May 2021 Scottish Parliament election, and this could increase pressure on the Westminster government to allow another vote of Scottish independence,” says Foley.
The issue gained prominence on October 14 after polling company Ipsos MORI revealed support for independence in Scotland had reached its highest level on record, with a whopping 58% of Scots who are likely to vote saying they are inclined to take their country out of the UK if they were asked to vote today.
Politics are likely to prove to be a headwind that contains enthusiasm towards the Pound. Foley says PM Johnson’s popularity among his own party faithful is at a low ebb after a series of policy U-turns this year and on the back of criticism over his handling of the Covid-19 crisis.
Scottish independence matters for the Pound, with the 2014 referendum resulting in the Pound falling as it absorbed a risk-premium in anticipation of a potential vote for independence, with declines accelerating in response to some polls that suggested the outcome would be close.
The currency recovered following a result in favor of the status quo.
Economics are also unfavorable given England has this week entered a second lockdown and joins the other nations of the UK in having significant restrictions on movement, which economists say will knock the economy into contraction once more.
Granted, with other European nations and the U.S. facing second waves of covid-19, the relative damage of the lockdown is mitigated. However, data does show the UK to have already been the second-most negatively impacted economy in Europe from the first lockdown.
“The four-week lockdown announced by the PM from November 5 has pulled the rug away from hopes of a UK recovery in the final quarter of the year. In turn, this has injected fresh life into speculation about the prospects of a negative interest rate from the BoE. This too is likely to cloud the outlook for the pound going forward,” says Foley.
Rabobank is forecasting the Pound-to-Dollar exchange rate to trade at 1.30 in three months, 1.29 in six months, and 1.34 at this point in 2021.
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