Politics has dominated the currency markets over the past week as the Fed and the Scottish referendum make an impact. The dollar experienced a 'violent' upswing on Wednesday after the US Federal Reserve’s announcement, and the pound could be preparing for a crash as the result in Scottish independence vote draws near.
Saxo Bank’s Head of FX strategy John Hardy believes that investors should prepare for fluctuations in the currency market given the attention surrounding government institutions. He notes that Janet Yellen’s comments on Wednesday were consistent with previous action from the Fed, although there was a “huge reaction in the markets.” John attributes the dollar’s positive momentum to the fact that “the US Fed is unwinding policy while other central banks are indulging in more easing.” The dollar is poised to continue to perform, but upcoming economic data on the US recovery will dictate the strength of the dollar’s rally. Currencies from emerging markets have yet to weaken against the dollar, which John says he is keeping an eye on for a future potential play.
As Scotland’s vote for independence comes to a conclusion, sterling could experience a swing on Friday morning similar to the one the dollar experienced earlier in the week. John cautions traders holding sterling ahead of the results from the election saying that a ‘yes’ vote could trigger an “enormous move to the downside” while a ‘no’ vote would likely signal a rally for GBP.
