The short answer is potentially.
In recent years we have seen politics have a significant influence on FX markets, in large part due to the overarching and slightly controversial nature of the subject matter; Brexit, President Trump and other leadership challenges to name but a few. In recent days, we have seen further controversies surrounding Prime Minster Johnson which are being looked at independently. Also, it has not been short of controversy with Scottish National Party (SNP) leader Nicola Sturgeon weathering the storm and remaining in power.
May 6th will see the Scottish parliamentary election with the SNP with a second independence referendum front and centre of its manifesto. The SNP currently hold 61 seats in a 129-seat parliament. If the SNP does not increase its overall majority, it will find it difficult to credibly continue its rallying call for a second independence referendum. If we see a larger majority than 65, it will be expected that further pressure will be put on the UK government to grant another independence referendum.
Why Does This Matter?
Sterling has been very sensitive to political uncertainty in recent years and despite the UK leaving the EU, Brexit concerns remain as ongoing discussions continue. In recent days, tension has peaked as French minister Clement Beaune warns ‘retaliation measures’ will be taken in sectors like financial services if fishing promises agreed between the UK and EU aren’t met.
Whilst we have seen Prime Minister Johnson continue to rule out a second independence referendum, his position of strength may be questioned at the moment as he faces backlash from recent political mishaps. This could add another headache for PM Johnson, and the SNP may find a way to get PM Johnson to cave on this matter; is this a Brexit referendum déjà vu?
When Could An Independence Vote Take Place?
Based on analysts’ views and betting markets, the earliest plausible date for independence is 2025, due to the time it would take to stage a new referendum and negotiate a separation. Betting markets show a below 5% chance for an independence vote this year despite the challenges that PM Johnson is facing.
What’s Next for the Sterling
Sterling has traded in a sideways pattern against both the dollar and single currency for the past couple of weeks despite positive data reading and the reopening of the economy. Positive news from the vaccination rollout in the UK has been largely priced in and could also be PM Johnson’s saving grace as political noise around Britain’s ruling conservative party has left the currency largely unaffected for now. However, the outcome of the Scottish election could dictate price action due to future uncertainty emerging.
A large majority of over 65 seats by the SNP could result in Sterling weakening as it will likely increase political uncertainty, especially with PM Johnson in a vulnerable position right now. A smaller number of seats currently held by the SNP could kill and any hopes of a second Scottish Independence vote, providing more certainty of the union.
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