Scotland uncertainty keeps British pound volatile

LONDON: The pound recovered from a 10-month low against the dollar and a three-month trough against the euro on Wednesday as the market paused for breath after a week-long sell off on fears Scotland will vote for independence.

Sterling got a slight boost from Bank of England chief Mark Carney, who reiterated in comments to lawmakers that the central bank was inching towards a tightening of monetary policy.

But any uptick was likely to be temporary given the risk that Scots could choose to break their country's three-centuries-old union with England at a referendum next week.

Secession would cause great uncertainty for sterling assets, especially as the currency is centre-stage in the referendum debate. There is also little clarity on a number of other issues, ranging from debt to North Sea oil revenues.

"Carney's comments are driving intra-day moves, but the underlying sentiment is one of nervousness because of Scotland," said Richard Wiltshire, a spot trader at ETX Capital.

"Sterling has fallen sharply in the past week, so the sell off is taking a breather. We will see a lot of volatility, but it would be correct to say people are looking to sell into rallies ahead of the referendum."

Earlier in the day, sterling sank to fresh lows with traders citing an unverified web poll conducted by an independent blogger that showed the pro-independence camp leading with 53.9 percent to 46.1 percent for those who intended to vote "No". http://barker.co.uk/scotlandpoll

Market talk was focused on another poll due to be released late on Wednesday by the Survation polling agency for the Daily Record. The agency said on Twitter that those results would be "very interesting".

Sterling slid to $1.6052 before recovering. It was last trading at $1.6160, up 0.35 percent on the day, but way below $1.6645 seen at the start of September.

The euro, which touched its strongest since June at 80.635 pence in morning trade, also fell. It last traded at 80.05 pence, down 0.4 percent on the day.

Ian Stannard, head of European currency strategy at Morgan Stanley said it was likely that there will be many unverified polls in the lead up to the referendum on Sept. 18, which could see sterling fall further.

"Several polls coming out giving that message are going to have a continued impact on the market."

VOLATILE MOVES

The uncertainty generated by those polls was driving nervous investors, including hedge funds, to seek protection against sharp fluctuations in the pound, option traders said.

The one-month implied volatility for sterling/dollar rose to 11.35 percent -- the highest since November 2011. Traders also cited robust demand for one-week implied sterling/dollar volatilities which will capture the last day of the referendum campaign.

Many investors fear that a Scottish split would leave the remaining UK saddled with higher debt and a smaller domestic market that could hurt future investments.

A rise in debt could lead to a possible downgrade by rating agencies and outflows from the UK, with Governor Carney saying on Wednesday that the BoE will implement contingency plans if needed, to support financial stability in the UK.