The pound fell by nearly 1% against the US dollar during trading on Monday as markets digested the increased probability of a yes vote for Scotland to exit the UK – the biggest drop so far this year.
Some British companies with a large exposure to Scotland saw stock prices fall sharply as well. Bank of Scotland owner Lloyds Group closed a fraction under 3% down, RBS fell by 1.3% and engineering company Babcock International fell 2.3%.
Whether the poll was an exception or the beginning of a trend will only be known in the coming days once further polling result have come through, however polls of polls still put the 'No' vote comfortably in the lead.
Some see today’ events as an overreaction by markets. “We’re not as positive on the British pound as we were earlier in the year but the sell off on Scottish independence fears feels like it’s getting overdone,” said Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment.
“A run of marginally weaker housing and manufacturing sector data in the UK relative to the US justifies a weakening trend in sterling versus the dollar but the clear policy divergence between likely Bank of England tightening relative to ECB easing continues to favour sterling versus the euro irrespective of the outcome of the referendum on Scottish independence,” Greetham added.
“A strong bounce in sterling is likely on a ‘No’ vote, which is still very much the most likely outcome,” he continued. A surprise ‘Yes’ vote would ‘make things messier’ he warned but he would still favour sterling over the Euro even in that scenario, Greetham said.
Brenda Kelly, chief market strategist at IG Group said today’s big falls are indicative of the complacency in financial markets that has been surrounding the Scottish referendum. “The effect on sterling was sharp and dramatic with the pound sinking to levels last seen in November last year against the dollar,” she said.
“The prospect of exiting the pound could trigger bank runs as savers attempt to protect their deposits,” Kelly warned. “Banks based in Scotland are widely expected to move down south and thus this significant flow of capital leaving Scotland would do no good to the Scottish economy,” she added.
