Scotland Vote Critical For Pound Sterling, Euro; US Dollar Led By Fed Results

Forecast for Friday: if Scotland votes Yes a potential crisis for foreign exchange could emerge, with Pound Sterling conversion rates at its heart. However, ahead of the vote is the FOMC meeting, which if it has a more cautious outlook could trigger a rally in sterling, as the UK – US yield spread widens. 

Exchange Rates at Time of Last Update:

The pound to US dollar exchange rate: 1 GBP converts into 1.6320 USD. 
The euro to US dollar exchange rate: 1 EUR converts into 1.2836 USD. 
The euro to pound exchange rate: 1 EUR converts into 0.7864 GBP.

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GBP Pound: Positive Economic Data Holds Sterling Steady

Positive jobs and wage data and minutes from the BOE’s September meeting that showed two policymakers voted in favour of raising rates helped lift the pound overnight.

Overnight, data showed the number of Britons claiming unemployment benefits fell by 37,200 in August, which was better than expected and that average earnings rose by a very healthy 0.6%(y/y) in July.

Looking at the Scottish referendum a yes vote could trigger a decline for the GBP/US Dollar, while a win for the no camp could see it get back to 1.6600.

Due to the uncertainty for an independent Scotland, the larger market reaction will be around a yes vote, while a no vote could see an initial move higher in the pound before it starts to fade.

The extent of upside for the Pound Sterling/US Dollar on Friday could depend on the margin of victory for a no vote. If no wins by only a narrow margin, GBP/US Dollar upside could be restricted.

A no vote would likely shift the market focus back to fundamentals, which should see the pound recoup much of its recent losses.

The British pound firmed off of its 10 month low against the dollar after the latest poll on Scottish independence showed the No camp slightly in the lead.

Questions exist about the future of the currency, taxes, oil revenues, trade and British military bases in Scotland.

Importantly, it also raises questions about how the UK’s national debt will be divided up, which would likely see Britain’s debt-to-GDP ratio rise if it is a Yes victory. 

Euro: Watches US Economic Announcements

The Euro was little moved overnight ahead of the FOMC monetary policy statement and press conference by Janet Yellen.

Investors overlooked an upward revision to Euro zone CPI in August from 0.3%(m/m) to 0.4%(m/m) as it likely does little to change the outlook for additional monetary support from the ECB.

While no change to today’s FOMC could send the dollar lower in the near-term, any gains in the Euro will likely continue to be viewed as selling opportunities.

Consequently, the single currency’s upside will continue to be limited.  

US Dollar: Steady Ahead of Fed

The US dollar stuck to narrow ranges overnight as investors braced for the FOMC monetary policy statement and the following press conference by Fed Chair Janet Yellen.

The Fed is expected to cut its monthly bond purchase by another $10 billion to $15 billion per month but make no changes to its key lending rate.

The Fed will also release its most recent forecasts for inflation, growth and borrowing costs this afternoon.

Much debate has focused on the Fed’s forward guidance, specifically on the language used to describe the period between the end of QE and the timing of its first rate hike.

WSJ yesterday reported Fed language and the first rate hike would not change sending yields lower and lessening the dollar’s appeal somewhat.

But any change in language and sooner rate rise will send both Treasury yields and the dollar broadly higher.

A hawkish Yellen could trigger a rebound in the dollar, which could weigh on GBP/US Dollar possibly sending it back to its low from September.