Friday 19th September 2014
Well that was certainly an interesting week in the currency markets. Not since the crash of 2008 have I seen such large volatility and huge amounts of my clients securing currency to protect against adverse exchange rate movements. Having been on the trading floor for over 24 hours in the last 2 days I’m about ready for the weekend!
So now we know, Scotland will remain part of the United Kingdom. I thought it was likely the No vote would win the day, and that is what we have seen.
What effect did the No vote have on exchange rates?
Over the last few weeks Sterling has dropped a little on fears that Scotland would vote Yes for independence. Last night when it became clear Scotland would vote against leaving the union, Sterling spiked to multi-year highs against the Euro, as the chart below shows:
However the spike was short lived. I warned earlier in the week that in the event of a No vote, we would probably see a slightly spike in Sterling but it would then drop back off again, and as you can see from the chart above, that is exactly what has happened.
Which way could exchange rates move now?
It’s impossible to know, but I personally can’t see rates getting any higher. The levels we’re at right now are around a 2 year high vs the Euro, and not far from a 6 year high. I think focus will now return to fundamental economic data.
On the one hand, Unemployment is down and interest rates are likely to rise next year. But I don’t think this will cause the Pound to go higher as any increases are going to be gradual. There is also the issue of the economic uncertainty that further devolved powers to Scotland will create, and of course in going down this road Wales and England may also wish to negotiate new terms. Currency markets hate uncertainty and this could cause the Pound to drop further.
Its worth noting a few years ago when rates were at these levels, we quickly saw things drop so those holding out for further gains should be cautious
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