Scotland has been joined together with England in the United Kingdom since 1707. Nonetheless for some time now many people in Scotland have been arguing that they should become an independent country again, and the province will vote on the issue on September 18th.



Scottish secession would be an enormous change for the U.K., yet it isn't priced into the FX market at all. This graph of polls on the question explains why. The results have been pretty consistent recently: the percent of people who intend to vote "yes" in favor of independence fluctuates around 36 percent, while the "no" vote is around 46 percent. So the "no" vote is in the lead and has been for some time. That's why the market isn't particularly worried about Scotland breaking away. But still, with the undecided vote at around 16 percent, it's possible that Scotland could vote to leave the UK. A lot depends just on who shows up to vote on the day.

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Since a "no" vote is more likely, let's first discuss what that would mean for the pound. On the surface, nothing changes, so it looks like it shouldn't have any impact on the currency. But in fact two things would probably change. First off, unless the "no" vote got overwhelming support, there would still be some doubts. The "yes" camp would probably try to keep the issue alive and schedule another vote in a few years. That's what happened with Quebec, the French-speaking province of Canada. Quebec voted to remain as part of Canada in 1980, but the issue didn't really die until they held another referendum 15 years later and the separatists lost that one too. So there may be some uncertainty about Scotland's place in the UK even after the referendum, which could be a drag on growth, at least in Scotland.

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Moreover, even if they vote "no" and decide to stay in the U.K., the Scottish people are clearly demanding more local control over their lives. They'll probably get it after the election. And if Scotland gets more local control, then the rest of the country will probably get more local control too. This means either way, fundamental changes are likely in the way Britain is managed. That could be good for the country, or it could be bad. We won't know in the short term. But over the longer term, it could make a difference in the productivity of the U.K. economy and therefore the strength of the pound. We won't know which way for many years, though.