Pro-independence parties won a majority in Scotland’s parliament on Saturday, paving the way for a high-stakes political, legal and constitutional battle with British Prime Minister Boris Johnson over the future of the United Kingdom.
But the pound strengthened as market participants did not interpret this as a near-term risk and welcomed the fact that Scottish leader Nicola Sturgeon said that her first task was to deal with the COVID-19 pandemic.
“The likelihood of a second referendum should increase but it is not yet certain to be held and the potential timing remains unclear,” wrote MUFG currency analyst Lee Hardman in a note to clients.
“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.”
Any second referendum on Scottish independence requires the approval of the UK government and Prime Minister Boris Johnson has ruled this out, saying the country needs to focus on more pressing concerns such as the recovery from the pandemic.
Analysts said the move in cable was due more to dollar weakness, as the greenback dropped to a two-month low after a disappointing U.S. employment report.
At 0745 GMT, the pound was up 0.5% against the dollar at $1.4061.
It was up 0.7% on the day at 86.335 pence per euro - which was only its strongest since last Thursday.
“We read the move as more of a legacy as the market is moving towards the Bank of England’s bullish set of UK forecasts and now greater confidence in the soft dollar environment,” ING FX strategists said.
The Bank of England said Britain’s economy would grow by the most since World War Two this year and slowed the pace of its trillion dollar bond-purchasing programme, but stressed it was not reversing its stimulus.
Marshall Gittler, head of investment research at BDSwiss Group, wrote in a note that the pound may also be benefiting from the opposition Labour Party losing control of a number of authorities in local elections.
“The boost to Conservative control is considered a ‘Good Thing’ by the reflexively conservative financial markets,” he said.
Elsewhere, CFTC positioning data showed that speculators reduced their net long position on the pound in the week to May 4. Reporting by Elizabeth Howcroft Editing by Gareth Jones