ING on GBP and Scottish elections: Little imminent risk ahead

imageForex2 hours ago (May 04, 2021 10:04)

© Reuters.

By Samuel Indyk – On Thursday, Scotland goes to the polls to vote in the Scottish parliamentary election. The key thing to look out for (or worry for some) is whether the Scottish National Party (SNP) wins enough seats for an outright majority. If they do, there is likely to be increased calls for a second Scottish Independence referendum, after the previous attempt in 2014.

Currently the SNP does not hold an outright majority and the election this week looks like a close-run thing. Latest polling shows the SNP will gain just under 50% of the vote share with the Conservatives and Labour both picking up around 20% each. Whether that translates into a majority of seats is currently unclear, but it is certainly enough to cause jitters among some GBP traders.

How Likely Is A Second Referendum?

ING notes that, as things stand, the UK government would have to give its consent to a second independence referendum and there has been little sign the Prime Minister Boris Johnson intends on doing so.

“An imminent referendum is unlikely, though a further refusal by the UK government to allow a vote may potentially spur further pro-independence feeling in Scotland,” ING analysts said in a research note.

Impact On GBP?

Although a potential SNP majority could bring negative news headlines regarding a referendum, ING do not expect this to have on overly negative impact on sterling for three reasons.

Firstly, even if pro-independence parties win a majority, a referendum could still be years, rather than months, away.

Secondly, as observed before the Brexit referendum, the risk premia only started to build into sterling around six months before the event.

And thirdly, the 2014 Scottish referendum did not translate into a material build up of GBP risk premium.

ING still remain bullish on GBP despite some of the headwinds seen in April, such as fears over the AstraZeneca (LON:AZN) vaccine and the turmoil sweeping up Prime Minister Johnson and his flat redecoration.

“With the UK economy likely to see a meaningful recovery this quarter, we expect GBP to remain one of the biggest longs in the G10 FX space for now,” ING said.

ING on GBP and Scottish elections: Little imminent risk ahead

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