Scotland votes No, what now?

In the end, the referendum result ended up being a bigger win for the No camp than the late polls had predicted. The Yes campaign had gathered momentum in the last two weeks, but it burnt itself out by polling day. The final outcome was 55% for the No camp to 45% to the Yes camp. Sterling has had a good night and UK equity futures point to a 1% increase when European markets open.

The reaction in GBPUSD was classic buy the rumour, sell the fact. GBPUSD rallied from 1.6250 to 1.6525 during the last 24 hours, however, the official announcement that the No campaign had won triggered a sell-off as the prospect of massive devolution for the whole of the UK ended up trumping the outcome of the referendum as the biggest driver for Scotland.

New Powers for Scotland:

The three leaders of the main UK parties have pledged greater powers for Scotland, known as Devo Max. The UK’s political leaders threw in a lot of devolution measures after polls started to show the Yes camp gaining ground in the two weeks before the Scottish vote. This has upset some English politicians, particularly in Cameron’s Conservative party, who object to giving Scotland extra powers, and money, on the back of a No vote.

Where does this leave the rest of the UK?

Now that the referendum is out of the way, the prospect of devolution is the next political hurdle to get over. The biggest impact of Devo Max could actually be felt in England, as Prime Minister Cameron said that enhanced powers for Scotland can’t be done without looking at the needs of the other nations, including England. Although the devil is the in the detail, the legacy of the Scottish referendum could be the slow death of centralised power in Westminster. We don’t know what Devo Max will mean for Scotland or the rest of the UK at this time, it is likely to include fiscal powers – the ability to raise taxes and control public spending, it could also create a hierarchy of politicians – for example Scottish MPs may not be able to vote on English issues and vice versa. These are major changes to the UK constitution, so change could still be afoot.

What will Scotland do now?

With 1.6 million people voting Yes for independence, vs. nearly 2 million people voting No, if Westminster does not start Devo Max negotiations in a timely manner then the SNP (Scottish National Party who led the Yes campaign) could call for a repeat referendum sooner than the 15 year wait they pledged to before the vote.

At this stage there is no outline for devolution for Scotland and the rest of the UK. Thus the 55% of people who voted No, but were told that the status quo would not stay the same, essentially do not know what they voted for…

The big issues for investors to digest right now include:

1, How the Scottish referendum vote could impact on next year’s UK General Election. If the Tories manage to pull off Devo Max for Scotland and the wider UK, then it could boost their popularity in the run up to next year’s election.

2, A boost for the Tory party could spark fears that they may win next year’s election, which could trigger a referendum on the UK’s EU membership in 2017.

Have we seen the peak in GBPUSD?

The Scottish referendum may be over, but political uncertainty is here to stay in the UK. Markets tend to be fearful of political uncertainty, especially when it could change the political landscape in a major global power like the UK. Thus, the fairly muted market reaction to the win for the No campaign seems the correct reaction as we wait to see what Devo Max really means for the UK. We believe that we may have seen the peak for GBPUSD on 15th July at 1.7192, and we may see cable drift lower from here.

Going forward, we would urge caution if you are trading GBP. While we continue to think that the BOE will be one of the first of the major central banks to hike rates, it could struggle against the US dollar, and other higher yielding currencies. We think the pound stands a better chance against currencies where central banks are still considering easing measures, such as the EUR, CHF and JPY.

Overall, what a night! What a win for democracy, and what exciting Constitutional changes ahead. From a personal point of view the people have spoken, and that is one of the most thrilling political developments in years. With my research director hat on, however, the uncertainty this creates is bad news for sterling and could limit foreign investment in the country until these massive devolution plans for the UK are hammered out.