Sterling plunges on prospect of Scottish independence vote

Talk of Scottish independence "was the straw that broke the camel’s back" for the pound, said one analyst.

Scotland first minister Nicola Sturgeon says that she wants to proceed with a new independence referendum.

Sterling plunged to a 13-month low against the euro and fell below $1.20 for the first time since the start of the pandemic after Nicola Sturgeon, Scotland’s first minister, said she was set to share details of plans for a new independence referendum.

Ms Sturgeon said she was nearly ready to give more details on how Scotland’s devolved parliament could move ahead with a new independence referendum without the consent of the British government.

British prime minister Boris Johnson does not believe that now is the time to be talking about another referendum on Scottish independence, his spokesman said.

Mr Johnson and his Conservative Party, which is in opposition in Scotland, strongly oppose a referendum, saying the issue was settled in 2014 when the Scots voted against independence by 55% to 45%.

The pound fell 1.2% to 86.81p against the euro, its lowest level against the single currency since May last year.

After rising against the dollar earlier in the day, the pound fell 1.1% to $1.1993, its lowest level since March 2020.

If I were to isolate the [pound’s] move lower down to one event, I’d most probably say that the Scottish independence risk was the straw that broke the camel’s back,” said Simon Harvey, head of FX analysis at Monex Europe.

Sterling has weakened more than 11% against a robust dollar since the start of the year amid a grim outlook for the economy and political instability in Britain.

Data shows the UK jobless rate ticked higher in the first increase since late 2020.

Britain’s growth is seen among the weakest for rich countries in the coming months and there is uncertainty over how fast the Bank of England — which is expected to raise interest rates again tomorrow — can tighten policy this year to tame inflation without further hurting the economy.

Kleinwort Hambros chief investment officer Fahad Kamal said the prospect of a new Scottish independence vote was “really bad news across a number of things”.

The UK has huge imported energy inflation and it is getting hit on both sides, from oil prices going up and sterling weakening," he said.

"It is putting Britain on a dangerous inflation trajectory and there is very little the BoE can do.”

Data this week shows Britain’s economy unexpectedly shrank in April, adding to fears of a sharp slowdown.

On Monday, Britain published plans to override post-Brexittrade rules for the North by scrapping checks and challenging the role played by the EU’s court in a new clash with Brussels.

News that the Johnson government want to rewrite the Northern Ireland Protocol is another negative for the UK investment backdrop,” said Jane Foley, head of FX strategy at Rabobank in London.

The British 10-year gilt, or bond, rose by 11 basis points to trade at 2.44% yesterday. That’s ahead of an anticipated rate hike tomorrow by the Bank of England to fight inflation.

Meanwhile, the 10-year German bond was trading at 1.5% and the Irish equivalent bond was at 2.18%.

Reuters, with additional reporting by the Irish Examiner