British Pound Sterling | Currency News Views and Outlook

British Pound Sterling: Currency down vs EUR, USD but up vs AUD in tricky trading conditions; negative aspersions cast on UK credit rating

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Category: British Pound Sterling

Published on Tuesday, 14 February 2012 10:01

Written by Sam Coventry

Pound exchange rates are finding mixed fortunes this morning in line with weaker markets:

British Pound Sterling (GBP) in Euro (EUR): GBP/EUR is 0.15% lower at 1.1934. British Pound Sterling (GBP) in US Dollar (USD): GBP/USD is 0.17% lower at 1.5741. British Pound Sterling (GBP) in Australian Dollar (AUD): GBP/AUD is 0.18% higher at 1.4722.

That said, markets are not weak enough to prompt the familiar risk associated trades that would push the pound into strong daily gains vs the euro.

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Moody’s affirmed the UK’s Aaa rating, but lowered the outlook to negative from stable.

"This suggests a one-third chance that the UK may lose its Aaa status in the next 12-18 months. We note that this is not the first ratings action the UK has seen in recent years. On May 21, 2009 S&P also lowered the outlook to negative, only to raise it back to stable over a year later on Oct. 26, 2010. The rating itself was not downgraded during this time," says a morning exchange rate note from UBS.

This is however the first time negative aspersions have been cast on the UK’s rating since the Eurozone debt crisis erupted.

UBS doubt Gilts will sell-off on the back of this.

"However, even this mild (and distant) threat to the rating could cause some investors to think again about whether UK Gilts offer a real safe haven alternative to euro-denominated bonds. And any decline in Gilt inflows from overseas could take some of the wind out of Cable’s sails," says UBS.

The Bank of England is due to release its quarterly inflation report on Wednesday.

The inflation guidance may give a better understanding of policy direction in the coming months, while markets will also take note of the growth forecasts.

UBS UK economist expects the MPC will acknowledge that conditions have improved since the November report, but also that it stands ready to expand the QE programme should the outlook deteriorate again.