Strategy & Operations » Governance » Sterling hammered in wake of downgrade

IT HAS BEEN on cards for a while but the UK losing its AAA credit rating has still shocked the market, particularly in its timing. Rumours of a downgrade were rife and the pound has struggled recently as a result. Sterling has depreciated by 8% against the US dollar since December 2012 and as much as 11.5% versus the euro since October last year but the most common view was that a credit rating downgrade was most likely to follow the UK’s Q1 GDP figure which is released in April. The GDP release is likely to confirm that we will have entered a triple dip recession, when put in this context a rating downgrade is no surprise.

The downgrade compounds the recent flow of bad news from the UK and brings both political uncertainty and monetary policy concerns. The chancellor has hung his hat on the UK’s prized AAA credit rating. Strict austerity measures have been implemented in order to get the UK out of debt and keep rating agencies at bay. Moody’s downgrade shows a clear failure to do so and undermines government policy moving forward. Where do they go from here? The BoE have already doubted the UK’s return from recession and with current policy clearly not working there is now debate over further QE, interest rate cuts and purchasing corporate bonds.

What is the result of all this uncertainty on the pound? The downgrade from AAA and the prospect of sluggish growth continuing for years has ensured that the news has been awash with stories of the pound’s ‘slump to parity with the euro’ and forecasts of GBP/USD down at 1.40 before the end of the year. The prospect of GBP weakness across the board is, understandably, concerning UK importers. Support levels have been broken and the pound is showing signs of being the ugliest of the ugly sisters for some time. UK businesses have been actively looking to protect themselves from further downside risk.

Mark Ackroyd is senior commercial dealer at Global Reach Partners