GBP/USD Vulnerable as the Union remains…but what form really?


“Big Government and Big Business … will try to impose social and cultural uniformity upon adults and their children. To achieve this they will (unless prevented) make use of all the mind-manipulating techniques at their disposal and will not hesitate to reinforce these methods of non-rational persuasion by economic coercion and threats of physical violence. If this kind of tyranny is to be avoided, we must begin without delay to educate ourselves and our children for freedom and self-government. Such an education for freedom should be … first of all in facts and in values — the facts of individual diversity and genetic uniqueness and the values of freedom, tolerance and mutual charity, which are the ethical corollaries of these facts.”

~ Aldous Huxley: (Brave New World Revisited)

Commentary & Analysis
GBP/USD Vulnerable as the Union remains…but what form really?

Maybe England and Scotland just gave the world a view of just how democracy really should work. To that we should all be grateful. For that process is likely the only way we can stave off the kind of ugly world quoted by Huxley above. [It is interesting and telling other governments seem quite afraid to offer the same as England did to Scotland. But is Pandora out of the box? We shall see.]

There is some irony a vote for Union may still end up changing the Union quite drastically under the terms of devolution.

Skeptics are now worried it could get very dicey for the Kingdom’s finances going forward. If this sentiment becomes prominent in the market, it is likely bad news for the British pound. Uncertainty is rising.

This is from Stephen King writing in the Financial Times this morning [my emphasis]:

The terms of Scottish “Devo-Max” are unclear. If Gordon Brown’s 12-Point Plan proves a reasonably accurate blueprint, Scotland will be able to both borrow more to fund infrastructure projects and set its own income tax. How much of this is genuinely new is unclear. The 2012 Scotland Act granted Holyrood income tax-setting powers – effective 2016 – and allowed the Scottish government to borrow up to £2bn a year via bond issuance to fund infrastructure.

What is more revolutionary for the UK’s public finances is the possibility – alluded to by David Cameron, prime minister – that England, Wales and Northern Ireland would be given similar powers. George Osborne will be feeling a little uneasy: the idea fiscal decisions could be scattered to the four corners of the kingdom may make sense in Number 10 but Number 11 is unlikely to be so enthusiastic.

Putting aside the nature and characteristics of an “English parliament”, devolution for all nations in the kingdom would presumably mean we’d soon be living in a world of local income taxes and local bond issuance: in other words, a fundamentally different world from the one UK citizens have inhabited. Maintaining fiscal discipline under these circumstances will be hard, particularly if the regional parliaments are controlled by different political parties.

The irony is that Westminster’s promises to Scotland, alongside a sudden recognition that the West Lothian question may finally need addressing, is in danger of creating precisely the kind of currency union that the Treasury ruled out back in February. That, in turn, suggests that Devo-Max may, in truth, have to be Devo-considerably-less-than-Max because otherwise the UK may by accident create an irreconcilable gap between regional fiscal governance and national monetary and fiscal policies.

Similar concerns were expressed by others before the Scottish vote. It likely helps explain why the pound pulled back sharply, after hitting a high, during the same session when the No votes proved decisive. Using our A-B-C simple pattern analysis, this may be a good time to consider shorting the pound for another major leg down…

GBP/USD Daily: A stop above the swing high at Wave B would make sense is you do enter this trade. And a good way to enter might be to let the market take you into this trade, i.e. pick a level below the current market price and set a sell stop. That type of entry avoids trying to pick any near-term corrective high and allows you to be trading with the momentum of the market near- and long-term as the trend is clearly down.