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UK 2021 Scottish parliamentary election results – concerns around Scottish independence ease near term

UK 2021 Scottish parliamentary election results – concerns around Scottish independence ease near term                            

  • GBP: As expected, pro-independence parties win a substantial majority in last week's Scottish elections but the main pro-independence party (the SNP) falls just short of an overall majority, winning 64 seats out of 129. Conservatives remain the second-largest party, while both Labor and the Liberal Democrats lose support. First Minister Nicola Sturgeon from the SNP re-affirms her commitment to a second independence vote, though she suggests the associated legislative push would likely only begin at the start of 2022 (after Covid-related challenges abate). While the UK government is careful not to rule out a referendum, Citi analysts think this remains Westminster's de facto position.  
  • GBP: The lack of an outright SNP majority and the de-escalatory tone of the UK government suggests some of the more acute near-term risks around Scottish independence may now ease in the short term – the easing political risk premium likely to support sterling. But results from the local elections in England also suggest cultural views articulated by Brexit remain a driving electoral force. Associated Conservative gains may incentivize more persistent fiscal support and a confrontational approach to the EU.
    • GBP: What next? – Speaking after Saturday’s results, Scottish First Minister Sturgeon doubles down on her commitment to a second independence vote, noting there is ‘no democratic justification… to block the right of the people of Scotland to choose their future.’ However, Ms. Sturgeon is more circumspect with respect to timing, noting that a second vote would only come after the immediate challenges associated with the pandemic have abated. Meanwhile,  UK PM Boris Johnson described a referendum in the current context as ‘irresponsible and reckless.’
    • GBP: The focus for both the Scottish and UK governments is now likely to turn to the ‘blame game.’ For the SNP, this means painting the UK government as blocking Scotland’s democratic will. For the UK government, this means suggesting the SNP are unreasonably and exclusively obsessed with independence. However, the UK government’s decision not to rule a vote out completely may dent the nationalist narrative over time.              


    Week Ahead – US inflationary indicators the key to watch                   

    • USDFed speak this week - Fed’s Evans Discusses Economic Outlook; Fed’s Williams speaks at SOFR Symposium; Fed Governor Brainard Discusses US Economic Outlook; Fed’s Daly Speaks at Community Bankers Event; Fed Governor Clarida Discusses US Economic Outlook; Fed’s Waller Discusses US Economic Outlook; Fed’s Bullard Discusses the US Economic and Policy Outlook and Fed’s Kaplan Takes Part in a Moderated Discussion
    • USD: US CPI MoM – Citi: 0.2%, median: 0.2%, prior: 0.6%; CPI YoY – Citi: 3.6%, median: 3.6%, prior: 2.6%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 2.4%, median: 2.3%, prior: 1.6% - With inflation now on the radar as the key US data to watch, Citi analysts expect a solid 0.301% increase in core CPI in April but would not be surprised by an even stronger increase that rounds to 0.4%. More persistent increases in shelter prices would be a sign that underlying inflation pressures are picking up and core PCE inflation above 2%YoY can be sustained through 2022.
    • USD: US Retail Sales – Citi: 0.6%, median: 1.0%, prior: 9.7%; Retail Sales ex Auto – Citi: 0.4%, median: 1.0%, prior: 8.4%; Retail Sales ex Auto, Gas – Citi: 0.3%, median: 2.1%, prior: 8.2%; Retail Sales Control Group – Citi: 0.2%, median: 1.0%, prior: 6.9% - Citi analysts expect a 0.6% increase in retail sales in April. Sales in the retail control groups should rise 0.2%.
    • USD: US Industrial Production – Citi: 0.2%, median: 1.3%, prior: 1.4%; Manufacturing Production – Citi: -0.8%, median: 2.5%, prior: 2.7%; Capacity Utilization – Citi: 74.5%, median: 75.3%, prior: 74.4% - Citi analysts expect the largest subset of manufacturing production to decline by 0.8%, reflecting various supply constraints that have turned more binding in April, suggesting shortages could last for longer into next year. With demand overall likely remaining strong, supply shortages could increasingly prove to be inflationary.
    • USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.2%, prior: 1.0%; PPI Final Demand YoY – Citi: 6.0%, median: 5.8%, prior: 4.2%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.3%, prior: 0.7%; PPI ex Food, Energy YoY – Citi: 3.7%, median: 3.7%, prior: 3.1%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.4%, median: 0.3%, prior: 0.6% - Citi analysts expect a solid 0.4% increase in PPI final demand and a similar increase in the core measures. Citi analysts expect details of April PPI to be supportive of a solid monthly increase in core PCE that will lead the Y/Y reading to rise above 2% this month.
    • USD: University of Michigan Consumer Sentiment – Citi: 88.7, median: 90.0, prior: 88.3; University of Michigan 1Yr Inflation Expectations – Citi: 3.5%, median: xx, prior: 3.4% - The most important aspect of the May University of Michigan consumer survey however will be inflation expectations for 1-year ahead but particularly long-term expectations for 5-10 years ahead. This consumer inflation expectations measures is one closely watched by the Fed, and a return towards higher levels would be an additional sign of possibly building inflationary pressures.


    Week Ahead (continued) – non-US data/ events this week

    • EUR: German ZEW Expectations, May: Forecast: 79.0, Prior: 70.7; ZEW Current Assessment, May: Forecast: -43.0, Prior: -48.8 – a month on from April, Germany’s vaccination campaign has accelerated significantly and new infections are falling steadily and the economy and financial markets are proving increasingly resilient to the lockdown. Potential for downside surprises though could come from the political side and semiconductor shortages.
    • GBP: UK GDP First Quarterly Estimate, 1Q: Forecast: -1.5% QQ, 4Q: 1.3% QQ; GDP Monthly Estimate, March: Forecast: 1.9% MM, Feb: 0.3% MM – Citi analysts expect UK GDP data for March to indicate a strong start to what is likely to be a robust GDP rebound over Q2. Citi analysts also expect a sharp rebound in April as stronger business confidence feeds through into a more rapid improvement across supply chains. The key uncertainty however, is on trade and expect the first quarterly assessment to suggest a marked hit to trade owing to the transition to new post-Brexit trading arrangements. Citi analysts expect the recovery in imports to prove more rapid from here than that in exports through the rest of 2021 – this would likely be a drag on sterling.
    • AUD: Australia will deliver the 2021 Federal Budget on Tuesday night - the budget will likely show an improvement in the bottom line thanks to parameter variation following better than expected economic outcomes. Normally not a currency mover but the Treasurer continues to see the budget being used as a tool to promote a sustained recovery, including driving the unemployment rate lower rather than as a means to reduce gross and net debt as a share of GDP.
    • CAD: Speech by BoC Governor Macklem – Citi analysts do not expect much change in messaging from the April BoC meeting. The speech will likely express optimism over the upcoming recovery. Citi analysts continue to expect the next adjustment to QE purchases to come at the July meeting, as gradual re-openings should be underway and the June employment report is likely to show job gains following weaker readings in April and May.
    • CNH: China CPI (%YoY) April: Citi 1.0, Consensus 1.0, Prior 0.4; PPI (%YoY) Citi 6.8, Consensus 6.5, Prior 4.4 - CPI inflation may climb to 1%YoY and PPI inflation might jump to 6.8%YoY in April. Services seem to be emerging out of the recent COVID-19 wave and might see modest price inflation. In the industrial space, the PMI indexes of purchasing price and producer price have moderated by -2.5ppt to a still elevated 66.9 and 57.3, respectively. The rally in commodities continues, resulting in upward price pressures in sectors like energy, chemicals, and base materials. And PPI inflation of -3.1%YoY in April 2020, sets a deeply low base.   


    This is an extract from the Daily Currency Update, dated May 11, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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