New Threat Emerges to UK Exit

Although there is already an abundance of uncertainty throughout European politics, the latest referendum developments underway in Scotland could complicate the Brexit outlook.  After calling an independence referendum in 2014 which resulted in the majority of Scots voting to stay in the United Kingdom, the Pound has fallen upon reports that Scotland plans to call a new referendum in March.  This coincides with the review being conducted by the House of Lords before approving the Government’s ability to trigger Article 50 and begin exit negotiations.

Besides complicating the Brexit outlook, it highlights the frayed relations between the country’s regions as the proposed exit initiation date rapidly approaches.  The immediate reaction was a steep selloff in the UK Pound, with GBPUSD falling as much as 80 pips before recovering modestly back above the 1.2400 level.

In a reflection of the deteriorating outlook in some European core and periphery states, TARGET2 payment imbalances have recently reached the highest point since 2012.  Chiefly behind this development has been the exodus of funds from countries like Spain, Italy, and Greece.  This accounts for Germany’s concerns when it comes to Greek negotiations over the next tranche of bailout funds.

At present, Germany is owed nearly €800 billion by Euro Area peers, underscoring its unwillingness to negotiate with borrowers as it could set a bad precedent in the event that a member state decides not to pay its bills or leave the Euro Area. Adding to the headaches facing investors is the dynamic political landscape which continues to favor anti-establishment, populist politicians from the right side of the spectrum.  Although slightly higher on the session, the EURUSD pair remains in the downward trend of the last month.