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Wondering why the pound has been unable to recover in the forex market despite stronger than expected economic data? As it turns out, the possibility of Scotland’s independence from the U.K. is weighing on the currency!

In the past couple of days, the British pound has ignored stronger than expected construction and services PMI readings, tumbling to its five-month low of 1.6438 against the dollar as early polls revealed that Scotland is likely to gain independence. Why does this matter anyway?

Economic and political analysts say that Scottish independence could create a lot of uncertainty, which might weigh on foreign investment and lead to a higher debt burden for the United Kingdom. The recent spike in volatility for the pound is a sign that investors are getting worried, with large financial institutions such as Morgan Stanley predicting a sharp selloff for the British currency in case Scotland cuts ties with the U.K.

scottish independence uk
Stick together or break free?

Apart from that, the U.K. government might be forced to postpone its general elections set to take place in May next year in this case. Some have warned of a potential constitutional meltdown if this happens.

Leader of Scottish National Party (SNP) Alex Salmond has been lobbying for Scottish independence for nearly three years already, prompting U.K. Prime Minister David Cameron to call for a referendum back in 2012. Since then, this political issue has been the talk of the town in Scotland, as supporters of independence want to break free mostly from the austerity measures of the U.K. government and have a more generous welfare state.

The actual referendum is scheduled on September 18, with the latest YouGov poll indicating that only 48% of respondents would vote against independence. If you think about it, the margin isn’t wide enough to guarantee a victory for the pro-independence camp, but the markets are making a pretty big deal about the drop in anti-independence votes from 51% a couple of weeks ago.

Removing the undecided voters from the survey would show that 53% of the remaining respondents would vote against independence while 47% might go against it, suggesting that there’s still a narrow chance that Scotland could stay in the United Kingdom. More surveys are being conducted for the time being and the results could continue to have a significant effect on the pound’s forex price action until the actual referendum takes place, with an increasing margin in favor of independence likely to weigh on the sterling.

Do you think the pound is in for more losses given the Scottish independence issue? Share your thoughts in our comment box or cast your votes in our poll below!