The Pound has lost significant ground against all of its major currency peers since Friday evening in reaction to news that Moody’s have stripped Britain of its triple-A credit rating for the first time since 1978.
Moody’s cut the UK sovereign rating down one notch from AAA to AA1 thirty minutes before markets closed for the weekend on Friday evening. Sterling spent the remaining half an hour in free-fall as investors desperately looked to sell the UK currency.
The Pound to US Dollar exchange rate declined by -0.7 cents towards the end of the New York session on Friday evening and then by another -0.9 cents when markets reopened for the week in Asia. GBP/USD sunk to a fresh 31-month low of 1.5074 and further losses are expected. The psychologically significant 1.5000 level could offer Sterling some much-needed respite, but technical support around May 2009’s low at 1.4753 could prove to be more substantial.
Sterling followed a very similar pattern against the Euro. GBP/EUR slid lower by -0.9 cents on Friday night, before shedding a further -0.9 cents during the beginning of the Asian session to reach a fresh 15-month low of 1.1404. Technical levels suggest that the Pound’s losses should be capped at around 1.1257.
Moody’s named “subdued growth expectations” and a “high and rising debt burden” as factors contributing to their decision:
“The main driver underpinning [the] decision to downgrade the UK’s government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and drag on the UK economy”.
The move means that Britain may have to pay more to borrow money, but is unlikely to dent investors’ confidence too much as UK gilts are considered to be one of the safest investments in the world. The downgrade could have far more severe consequences for British Governor George Osborne who has repeatedly pledged to safeguard the UK’s prized triple-A rating at all costs.
Labour’s Shadow Chancellor Ed Balls described the news as a “humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of economic and political credibility”.
However, Osborne did not appear willing to change towards a more growth-orientated approach and instead took the opportunity to highlight the importance of reducing the deficit:
“Tonight we have a stark reminder of the debt problems facing our country – and the clearest warning to anyone who thinks we can run away from dealing with these problems. Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it”.
In response to the announcement from Moody’s the Pound fell by over -1.5 cents against the Canadian Dollar to reach a 19-month low of 1.5410 (GBP/CAD), Sterling shrunk by -1.3 cents against the Australian Dollar to hit a 12-month low of 1.4630 (GBP/AUD), and the UK currency plunged by -1.75 cents to fresh all-time low of 1.8026 (GBP/NZD) against the New Zealand Dollar.
With the UK economy clouded in uncertainty it is expected that Fitch and Standard & Poor’s will follow suit and slash the UK’s credit rating in the near future. George Osborne is set to deliver his budget for 2013 on March 20th and there is a strong possibility that this will lead to further downgrades to the UK’s prized AAA credit rating.
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