Markets set for sterling sell-off after AAA setback for Britain
Analysts expect pound to weaken against dollar and euro in response to Moody's decision
Sterling was braced for a further sell-off today as financial markets geared up to respond to the decision of a major credit agency to strip the UK of its gold-plated rating.
The pound dipped to $1.5163 late on Friday in US trading, a two-year low, after Moody's announced it was downgrading British sovereign debt one notch from AAA to Aa1. The agency said that the move was a response to Britain's rising national debt and the poor growth outlook for the economy, which is teetering on the verge of an unprecedented triple-dip recession.
Asian and European financial markets will have their first opportunity to respond to the credit rating agency's decision today, with many analysts expecting sterling to weaken further against the euro and the dollar.
Simon Derrick , chief currency strategist of BNY Mellon, said Moody's decision would reinforce a "major shift" downwards for the pound. "[Sterling's] performance over the past twenty years has seen long periods of stability interspersed by sudden and dramatic revaluations or devaluations. Rarely have the trends been gentle," he said.
Andrew Sentance, a former member of the Monetary Policy Committee, pointed out that recent comments from senior policymakers at the Bank of England made it clear that they would welcome a lower exchange rate. "When policymakers seem to be talking down the pound it's a bit of a one-way bet for foreign exchange participants," he said.
Jim O'Neill, the head of Goldman Sachs' asset management arm, predicted that the downgrade would "add to sterling's weakness" but added that there was unlikely to be a collapse. "I'd say the impact will be more on domestic political debate than markets as most developed countries have already lost their AAA," he said.
The pound has been falling against the dollar and the euro for most of this year in response to the weakness of the domestic economy. The revelation last week that the Bank of England Governor recently voted for £25bn in more quantitative easing sent sterling lower on expectations of more money-printing by the central bank.
Ros Altmann, an economist and former head of the elderly pressure group Saga, argued that there could actually be benefits from Britain losing the top-notch credit rating if it prompted a rise in long-term interest rates. "Pension funds may benefit from loss of AAA if gilt yields rise and the pound falls," she said. "Assets and liability changes could reduce [pension funds'] deficits."
However, most economists doubt whether British government bond prices will fall dramatically in response to the downgrade. The US was stripped of its own AAA rating in 2011 by another agency, Standard & Poor's, and saw its borrowing costs decline. France's AAA was removed by two agencies in 2012 and has seen its borrowing costs steady. "There's just not that much choice now about where you invest" said Robert Wood of Berenberg Bank. Similarly, few analysts are worried about a shares sell-off. "From an equity market viewpoint the move to downgrade by one very small notch will most likely be seen as a relief," said Howard Wheeldon of Wheeldon Strategic Advisory.
Investors fear Berlusconi comeback
European bond investors are eyeing the Italian elections nervously, fearing that a strong performance by former Prime Minister Silvio Berlulsconi's centre-right party today could re-open the eurozone sovereign debt crisis. "People are heading into the election a bit more cautious. There was a lot more selling last week and a defensive stance," said the UBS currency strategist Geoffrey Yu. "The Italian elections top our list of risks as to what could still upset the progress in the eurozone," said Holger Schmieding of Berenberg Bank.
- 1 Howard Jacobson: Let's see the 'criticism' of Israel for what it really is
- 2 Game of Thrones author George RR Martin says 'f*** you' to fans who fear he will die before finishing Westeros saga
- 3 Belgium fan Axelle Despiegelaere lands L'Oreal campaign after World Cup viral photo
- 4 Britney Spears sings 'Alien' without Auto-Tune in embarrassing leaked audio clip
- 5 PornHub begs users to stop uploading video clips of Brazil getting beaten 7-1
Instagram of US airport security chiefs: Lipstick knives and IED training kits among items seized
Game of Thrones author George RR Martin says 'f*** you' to fans who fear he will die before finishing Westeros saga
Mick Jagger denies being World Cup curse and reason for Brazil’s embarrassing defeat
Israel-Gaza crisis: ‘We just want it to end… We don’t deserve to live like this’
Israel-Gaza crisis: Eight killed in Gaza Strip cafe while watching World Cup semi-final
Sustained immigration has not harmed Britons' employment, say government advisers
Australia facing international condemnation after turning around Sri Lankans at sea
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
There’s a nasty smell in the political air – and it’s coming from the Tories
iJobs Money & Business
£300 - £350 per day + competitive: Orgtel: My client, a leading bank, is curre...
£28000 - £32000 per annum + pension, 25 days holiday: Ashdown Group: A highly ...
Negotiable: Randstad Education Birmingham: Randstad Education are seeking a Fi...
£12 - £15 per hour: Cameron Kennedy Recruitment: Excellent opportunity to join...