Cable Stumbles on Scotland Referendum Fears

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Market Drivers February 28, 2017
Cable tumbles on Scottish referendum fears
USD/JPY finds support at 112.00
Nikkei -0.91% Dax 0.05%
Oil $54/bbl
Gold $1255/oz.

Europe and Asia:
AUD Business Inventories 0.3% vs. 0.5%
EUR EZ Money Supply 4.9% vs. 4.8%

North America:
USD Durable Goods 8:30
USD Pending Homes 10:00

Cable woke up on the wrong side of the bed today, at the start of week’s trade as the single currency tumbled below the 1.2400 figure on reports that Scotland may call a second independence referendum as early as next month.

The Times reported that Scottish FM Nicola Sturgeon may call for a vote in response to UK triggering Article 50 as early as next month, thus officially commencing the Brexit process. Scotland voted to remain in the EU, but also narrowly voted to remain in the UK during the first referendum on 2014.

It is unclear if the second referendum would change the results. Recent polling suggests that the Scots may still prefer to remain in the UK, despite the fact that they voted to stay in the European Union. Still, the second referendum could introduce an unwelcome note of volatility into what is already shaping up to be a highly contentious scenario and the government of PM May vehemently opposes the idea of a second Scottish referendum.

Scotland represents about 6% of UK GDP and about 8% of its population so that even if a secession were to take place, the economic impact on the UK would not be substantial. Still, the clear opposition from Scotts towards Brexit could become a long-term political problem for UK and adds an additional point of stress the exit strategy.

Cable found a modicum of support underneath the 1.2400 figure and traded back up to 1.2430 by London open. For now, the markets view the Scottish referendum as a nuisance story, but cable may continue to be under pressure as the week proceeds and focus shifts to economic data. The UK has a trio of PMIs coming out this week and if the data shows a further softening of economic activity sterling could drift lower to test long term support at 1.2300.

Elsewhere, in North America today the market will get a glimpse at the Durable Goods data and the Pending Home Sales later today. The market is looking for core number to match last month’s rise of 0.5% which would suggest that US economy continues on a health expansionary path and may provide a boost to USD/JPY which has been basing at 112.00 all night long.

Boris Schlossberg
Managing Director

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