GBP/USD to strengthen this year, shrugging off specter of Scottish referendum – MUFG

Broad-based US dollar weakness has helped to lift cable back above the 1.4000 level with the pair moving back towards the end of February high at 1.4237. The pound has also received a modest boost following the news that the SNP fell just short of winning a majority in Scottish parliamentary elections. In the view of economists at MUFG Bank, independence risks are too far in future to have lasting impact on sterling.

The most likely outcome following the election is then a protracted political tussle

“The SNP missed out on a majority by one seat winning 64 seats which was one seat better than they achieved at the last election in 2016. The SNP will now have to govern with the support from the other pro-independence Green party who won 8 seats. Together the pro-independence parties won a comfortable majority.” 

“While the SNP will be a little disappointed they did not win a majority on their own, they will continue to push the UK government to hold another independence referendum in the coming years.”

“The SNP will likely remain reluctant to hold an illegal referendum without Westminster consent, while the UK’s government refusal to hold another referendum could see public support for independence rise further. The likelihood of a second referendum should increase but it is not yet certain to be held and the potential timing remains unclear. It would though likely take at least a year at the earliest to pass legislation and hold a referendum.”

“Market participants will be further encouraged by comments from SNP Leader Sturgeon who said her immediate focus will be the pandemic. With independence risk so far in the future, we do not expect the developments to materially alter our outlook for the pound to continue to trade at stronger levels this year supported by the robust UK cyclical recovery and vastly diminished Brexit risks.”