The EUR/GBP for the end of Q4?

Neil Mellor, Currency strategy, on the Scottish referendum and GBP

What are the ramifications of a significantly weaker Pound?

The current Pound situation complicates BoE’s policy to a small degree. Clearly, any moderate movement in the currency is going to have an impact on the monetary policy equation. Having said that, there is only a reversal part of these sharp movements we have had over the past year. Therefore, in that respect, I do not think that we have yet got to the point where the current tendency is going to overly trouble the Bank of England. Undoubtedly, if the BoE starts manifesting itself in higher inflation rates, then it is caught in a rather awkward situation. However, for the time being, I believe, it is a fairly neutral factor for monetary policy.

Gordon Brown pledged that if Scots vote against breaking up the U.K. in this week’s referendum, he will put a bill before Parliament by January, giving them control over welfare, taxation and the economy. Would it be useful to implement this model and what could be the economic consequences?

This model has been widely talked about even before of Gordon Brown suggested that. Given the number of comments from David Cameron and Edward Miliband recently, it is assumed the “Devo-max” would be approaching, which stands for - devolution in involving a lot more fiscal authority. It is hard to indicate the degree of how much that will impact the economy. In my opinion, for the UK that is more of a political complication than an economic one. Respectively, this would cause a lot of confusion for the Great Britain London-based politicians, when the Scots would have power over their own fiscal autonomy, but also an equal over English autonomy. Therefore, that will cause a lot of ripples in the Conservative party.

For Scotland this is probably a way forward, but it does not change the fact that they have got a complicated and uncertain position. Hence, if a country has a full autonomy over your fiscal controls, it is still going to need quite a healthy amount of cash coming from the South as well. Therefore, it is hard to see how all that balances out. However, certainly, as far as the economic concern, “Devo-max” would be better than full independence.

Alongside the Scottish independence vote, what will be the main drivers for the Sterling until the end of 2014?

In case there is a “yes” vote for Scottish independence, then the Sterling will inevitably weaken further, since there is a lot of uncertainty, which is not going to go away anytime soon. Whereas, if there is a “no” vote, then we might expect a small appreciation in the British currency.

The problem I see is that the Pound was already weakening prior to a lot of the ambiguity that rose at the start of this month. Therefore, if there is a rebound, to my mind, there might be a temptation to sell into the Pound. The reason for that is – it is still unclear, not least given the recent data, whether the UK is still on track for the rate hike, which everyone was talking about in Q1 or even in Q2 of 2015. Hence, that uncertainty is still going to hang on even in the event of the Scottish “no” vote.

What are your forecasts for the GBP/USD and the EUR/GBP for the end of Q4? And what are your prospects on the GBP/CHF?

My guess is that the Sterling would weaken in both scenarios, however, in the “no” vote case, there might be a short-term bounce. Nevertheless, I still see the GBP/USD heading into 1.50ties by the end of 2014 either way.

It is very hard to forecast against the Euro, in the event of the renewed Pound weakness against the greenback. This would not necessarily translate into depreciation versus the Euro zone currency, due to the existence of the big ECB issue, and whether or not it is going to enter the possibility of quantitative easing. My guess is that these two processes will cancel each other out by the end of 2014, and if there is still a possibility of QE, I believe we are going to be roughly where we are. Hence, around about 79-80 pence level for the EUR/GBP is my year end guess.

Talking about the GBP/CHF it will very much depend on the SNP policy meeting and whether or not there is going to be a negative deposit rate, because then again you have got a currency that will perhaps be heading in a quite opposite direction than it has been recently. So it puts a lot of uncertainty on the matter and it will not be resolved until the end of this week.