May is expected to bring some volatility for the pound which can be a good thing for traders of the currency. The first week of May will be an important one for the pound as on the 6th of May, the Bank of England (BoE) will deliver its monetary policy decision and its quarterly Monetary Policy Report. Investors and analysts are also expecting the Scottish election to be a pound-sensitive event as it could result in a majority for pro-independence parties. In the near term, both events could affect the pound and set the tone for currency trading throughout the last month of Spring.

A hawkish tone from the bank could weigh on the pound

Economists will be closely watching the BoE’s upcoming meeting to understand whether the bank will change its quantitative easing programme by reducing its rate of asset purchases.  This is seen as a necessary measure to provide liquidity to the economy, and it will open the path for raising interest rates in the future. For this reason, if the bank decides to make such a move, markets will be pleasantly surprised, as three months ago the bank was seriously considering pushing interest rates into negative territory.

While such a move is welcomed and appropriate since the economy is recovering, it is still too early, and some economists believe that the bank will not be raising interest rates anytime soon. The BoE is more likely to remain cautious, and this might put some pressure for the pound. While the market expects interest rates to remain unchanged, they are not quite sure about the bank’s intention to reduce quantitative easing. For some analysts, there are concerns about the pandemic and unemployment which could rise following the withdrawal of the government’s support.

Scottish elections

Scotland will be voting for the next Holyrood parliament on 6th of May and political commentators say a strong result for pro-independence parties will inevitably lead to another independence referendum. However, financial analysts do not expect the Scottish elections to have a major impact on GBP. Regardless of the result, most experts do not believe this will immediately lead to an imminent vote for independence, as a second independence referendum is probably years away.

As things stand, it is also unlikely that Prime Minister Boris Johnson’s government will grant consent to hold a second referendum.  While who holds the power to allow a vote could ultimately be tested in the courts, at the same time the probability for an imminent referendum is small. A refusal from Boris Johnson could also further strengthen pro-independence sentiment in Scotland. The possibility of a second independence referendum is not going to go away and will play a key role in the next UK-wide general election in 2024.

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Traders have warned of pound volatility if Scotland backs an independence bid. It is expected that the pound will suffer in the coming months if Nicola Sturgeon wins a landslide majority in next month's Holyrood election. Unless there is certainty that there will not be a second independence referendum, the British pound will be potentially under threat.

On 6th of May, Scotland will vote for the next Holyrood parliament and if there is strong result for pro-independence parties then more pressure will be placed on the UK government to grant Scotland the right for another independence referendum. SNP leader Nicola Sturgeon has already vowed to push for a second referendum and her demand will be strengthened if pro-independence parties win more than 50 percent of the vote.

While the pound has risen since a trade agreement was sealed with the EU, the ensuing political uncertainty following the May elections could mean that risk-averse investors will stay away from buying UK assets. Polls show the pro-referendum SNP party could win the vote, but, recently, there have been strong concerns about the party’s ability to secure a majority.

What currency analysts are saying?

A heavily pro-independence vote in next month’s Scottish Parliament election could mean a fall in Sterling as investors will avoid trading British stocks. Stephen Gallo, European head of currency strategy BMO Capital Markets, said: “Come early May the markets will wake up to this and probably trade the size of the majority or the end result. The stronger Nicola Sturgeon’s position is, the more headline risk there’s going to be over the next three to six months regarding this issue.” He also said that currency movement won’t be huge but a strong SNP will mean that Sterling will find it difficult to extend its rally. Goldman Sachs’ strategist, Sharon Bell said that a “prolonged period of political uncertainty, coming straight after 5 years of Brexit uncertainty, would be unlikely to encourage global investors back to UK stocks.” A second Scottish referendum will be risky, but UK stocks are still cheap after a disappointing performance due to Brexit.

What would happen if the SNP were to win the majority?

If the SNP win a majority, Sturgeon has said that her party will seek a second referendum, and this is the reason that analysts are concerned. In a recent briefing to its clients, Berenberg has noted that the Scottish parliamentary elections could result in a majority for parties supporting Scottish independence.

The SNP currently rules in a minority government, but polling suggests that it is on course to win a majority, increasing pressure on Boris Johnson’s government to accept another independence vote.

An Ipsos Mori poll for STV News this week predicted that 70 of Holyrood’s 129 MSPs will be from the SNP, which means that Sturgeon’s party will get an 11-seat majority. Alex Salmond’s Alba Party has failed to have any affect in the polls, but his party as well as the Greens also support holding a second referendum. Any combination of the above parties will result in a pro-independence majority.

"Such an outcome could make waves in markets and refuel worries about the UK’s prospects following Brexit – which has raised the tail risk that Scotland may one day leave the UK to re-enter the EU as an independent country," says Holger Schmieding, Chief Economist at Berenberg.

The results of the 2014 Scottish referendum and the 2016 Brexit referendum have highlighted how uncertainty can affect Sterling exchange rates. The pound fell following concerns about the outcome of the 2014 independence referendum but immediately rose after it was clear that Alex Salmond’s independence movement was defeated.

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If you are a business transferring funds overseas, and are worried that sudden currency volatility could have a heavy impact on your funds, a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements and plan ahead of your currency exchange. If you are paying your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.