British Pound Sterling: UK currency feels the heat as golden AAA credit rating looks a little more vulnerable

Details

Category: Exchange Rates

Published on Thursday, 26 July 2012 09:06

Written by Sam Coventry

• Sam is on

• FX Updates to your inbox

• International Money Transfers at our sister site

"There is a higher risk that the country’s AAA credit rating will be changed. The latter may have a major effect since fund managers and central banks have been seen as sterling buyers lately" - Jyske Markets.

The pound sterling (Currency:GBP) is under the hammer again this morning as investors appear resigned to further monetary easing at the Bank of England in the wake of figures showing the UK economy is in deep recession.

The pound euro exchange rate is 0.13 pct up on Wednesday night's closing level to reach 1.2764 at 9:50 AM in London.

The pound dollar exchange rate is 0.08 pct in the red at 1.5487.

The pound Australian dollar exchange rate is 0.21 pct in the red at 1.4999.


The Bank of England has two options available - one being an interest rate cut that will take the rate below 0.5 pct. There has been an increasing level of discussion over this option from analysts and media pundits; could the Bank surprise us with a cut sooner rather than later?

There is also the possibility of further quantitative easing. The latest batch of 50bn GBP will be dispatched into the financial system over a course of months, so the immediate threat of additional stimulus here is limited.

For the British pound there is however the additional worry that the ratings agencies will downgrade the UKs AAA rating.

"The GDP data will undermine confidence and could lead to a cut in the UK AAA credit rating, which would undermine the potential for capital inflows – the primary reason why the Pound has managed to rise to a near four year against the Euro in recent weeks," warns Adam Solomon at TorFX.

Jyske Markets echo this sentiment:

"The very poor GDP figure increases the likelihood of an interest-rate cut and further quantitative easing measures. Moreover, there is a higher risk that the country’s AAA credit rating will be changed. The latter may have a major effect since fund managers and central banks have been seen as sterling buyers lately."

That said, there is also the view that the official figures could be inaccurate. Read what Goldman Sachs' UK economist thinks about it all here at our sister site.