06.05.202103:58 Forex Analysis & Reviews: The market is awaiting parliamentary elections in Scotland: how will the pound react?

On May 6, parliamentary elections will be held in Scotland, where members of the unicameral legislature will be elected. Unionists and nationalists will fight for the majority of votes. The leader of the nationalist movement, Nicola Sturgeon, promised her voters that if she wins, she will hold a new referendum on independence.

Given the fact that the nationalists are still leading in the opinion polls, this week may well mark the end of the 300-year-old union between England and Scotland, and at the same time the beginning of mass chaos in the UK economy in the coming years. In this regard, Citibank's trading offices are already admitting possible upcoming drawdowns in the markets.

Even if the nationalist party wins, the UK government may not agree to hold another referendum. But as the upcoming vote could trigger a situation similar to when the UK left the European Union, fund managers are once again turning to the forgotten rules of binary risk trading — an event where much depends on time.

Forecasts for the pound:

The pound was trading at 1.3914 against the dollar.

According to a Bloomberg survey, analysts believe that the British currency will hold this position until June. However, Credit Agricole SA experts strongly recommend that investors sell the British pound against the US dollar in a short position. Experts of the largest financial conglomerate in the UK and the world, Barclays PLC, do not approve of the call to open a long position on the pound against the euro due to the potential pre-election volatility. Credit strategists of the largest Swiss financial holding company UBS Group AG have lowered their forecast for a selected group of UK bank bonds: previously, the forecast was "above the market", now it has become "neutral". At the same time, UBS Group AG noted that a long position on British credit instruments risks being unprofitable due to a probable referendum.

Be that as it may, but the situation in the markets is clearly heating up. Market participants in the light of the impending storm will have to act quickly. At first, the markets ignore the existing risks, and then suddenly give in to panic. Jane Foley, head of currency strategy at Rabobank, is confident that the markets cannot ignore the upcoming elections and a possible referendum.

What if it happens?

The separation of Scotland from England means a complete restructuring. First of all, this will affect currency regulation. It will be necessary to decide how much of the British national debt will fall on the shoulders of a newly independent Scotland. This will be the beginning of a new trade relationship between Scotland and the rest of the UK. And the Scottish National Party's ambitions to join the European Union are creating huge border and trade tensions. Have market participants taken all these consequences into account? Julian Howard, director of broad Asset Management at GAM Investments, is convinced of the decline in the British pound and believes that the impending chaos will be much more disastrous for the UK economy than Brexit. This is because Scotland has had a much closer relationship with the UK over the past 300 years than the UK has with Europe.

It is also important that the current location of the main financial institutions in the event of a split in the United Kingdom risks changing. If they continue to operate in Edinburgh, Scottish banks will lose the support of the Bank of England's quantitative easing program, and will become noticeably less creditworthy.

The UK authorities will prevent any intention to hold a vote in the country for independence. The Government's refusal to grant the Scottish Parliament permission to make the vote legally binding is enough. However, this refusal may provoke a protracted debate over whether the Scottish Parliament can independently initiate a legal referendum.