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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...