Scotland referendum dominates in a key week for markets

• Scotland uncertainty poses key event risk for sterling markets
• FOMC to change its language on forward guidance
• Take-up of ECB TLTRO watched as guide to stimulus success

Event risk steps up a gear in the coming week. The Independence Referendum in Scotland (Thurs.) dominates what is otherwise also a busy week for domestic data. Internationally, the focus will primarily be on the US FOMC meeting (Weds.) and a key ECB liquidity operation (Thurs.). Both of these also have the potential to be big market movers.

Scotland’s Independence Referendum... Remaining polls will be scrutinised intensely, as market participants seek final guidance on how the result is likely to break. Over the past week the swings in the polls have put sterling under significant pressure. A further escalation in uncertainty either ahead of, or in the wake of, the result would risk adding to volatility. Polling stations are scheduled to close at 10pm on Thursday, with the results of the 32 local authority areas reported overnight. Depending on how close the result is, an indication of the outcome may be available in the early hours of Friday, although an official declaration is not expected until later in the day.

UK data to play second fiddle... Ordinarily, the upcoming domestic economic data could be expected to prompt a sizeable market reaction. Given the referendum, however, they are likely to have less impact than usual. Still, in the event of a no vote attention is likely to return quickly to the economic data for clues on the policy outlook. On the dovish side, we expect CPI inflation to have fallen back again in August. But balanced against this, wage growth and retail sales are both forecast to have picked up, and the unemployment rate is predicted to have dropped further. Furthermore, the minutes of the September MPC meeting are likely to show that the two MPC members (Weale and McCafferty) who dissented in favour of an immediate rate rise in August did so again this month (see back page for more details of our UK data forecasts).

Fed change of language?... Elsewhere, the US FOMC meeting (Weds.) provides the main international focus. Following recent comments from Fed members, and broadly positive economic data, we believe there is a good chance the FOMC will shift its language on forward guidance before its asset purchases end next month. Currently, the Fed adopts a time-dependent guidance that states the current level of interest rates will be maintained "for a considerable time after the asset purchase programme ends". It is increasingly clear, however, that this is causing divisions. As a result, we expect the Committee to move from time to purely data- dependent guidance. If so, expect the US dollar to appreciate further and US government bond yields to rise, especially at the short end of the curve. (see FOMC Preview, 12 September 2014).

Will TLTRO take-up disappoint?... Market attention will also be on the first tranche of the ECB’s Targeted LTRO programme (Thurs.), with the second to follow in December. Despite the additional measures announced in early September, the TLTRO remains a key part of the ECB’s plan for stimulating the euro area economy. In all, up to €400bn of extra liquidity is set to be offered to banks this year through this channel. The expectation is that the first tranche will be around €175-225bn. Anything below €150bn is likely to be viewed with disappointment by markets.

Finally... While the above events look set to dominate, upcoming international data will also be watched. In the US, industrial production, housing market and CPI/PPI inflation data due. Overall, we expect these to paint a picture of ongoing economic recovery within the context of limited price pressures. In the euro area, the German September ZEW survey (Tues.) is predicted to fall for the ninth consecutive month. The final estimate of August euro area CPI inflation is forecast to be unchanged at 0.3%.