The pound strengthened sharply yesterday as the near term likelihood of a Scottish independence referendum abated following the failure of the Scottish National Party (SNP) to win an outright majority in a national election over the weekend.

The market is betting the result has pushed back the risk of a near-term vote on independence.

Yet traders are bracing for further clashes over the UK's future down the road.

Sterling climbed by the most in almost a month to $1.4134, its highest level since February, after the SNP fell one seat short of a parliamentary majority.

Strategists from Rabobank to Credit Agricole cite the push for a referendum, which UK Prime Minister Boris Johnson opposes, as a headwind that could create volatility in the months to come.

"There are a lot of voices in the market that see the lack of a majority for the SNP combined with Johnson's refusal to hold a referendum as meaning that the risks to the union are a non-issue for the pound," said Jane Foley, head of foreign-exchange strategy at Rabobank. "I would be more cautious on this."

Investors will now be paying attention to how SNP's leader Nicola Sturgeon pursues the goal of changing Scotland's constitutional future.

Her party boosted its haul to 64 of the 129 seats in the Scottish Parliament and, alongside the Green party that also increased its share, would have enough to form a pro-independence majority. Johnson has said that he would not grant one any time soon, which could lead to a clash in the courts.

"'What matters is the UK economy, the Bank of England, the dollar and risk markets," said James Athey, of Aberdeen Standard Investments.

For Rabobank's Ms Foley, continued uncertainties over Scotland's future could spur volatility in sterling over the next 18 months. Sturgeon has said that if Mr Johnson wants to stop Scottish legislation on a referendum, he would have to go to the Supreme Court to challenge it.

Bloomberg