UK at risk of losing AAA rating

Good Morning. The pound fell yesterday after the ratings agency said Britain, due to its huge levles of government debt which we’ve talked about here before, was the major economy most at risk of losing its triple-A rating. It hurt the pound, and rates @ 08:30am stand as follows:

  • GBP/EUR 1.1144
  • GBP/USD 1.6755
  • GBP/AUD 1.7948
  • GBP/NZD 2.2545
  • GBP/CAD 1.7510
  • GBP/CHF 1.6828
  • GBP/ZAR 12.272
  • GBP/JPY 150.45
  • EUR/USD 1.5031

UK Rating
As the UK has been borrowing heavily to try and pull the economy out of recession, its weak financial position has hurt the pound, and investors and speculative traders often sell Sterling on any suggestion Britain may lose its top-notch rating.

Only Britain, the US, Germany and France are among the major economies are rated AAA and any change could affect the cost of government borrowing.

Today’s Bank of England’s quarterly Inflation Report could well also negatively affect the pound.

Inflation Report & Unemployment
The Bank of England quarterly publishes a report of the detailed economic analysis and inflation projections on which the Bank’s Monetary Policy Committee bases its interest rate decisions, and presents an assessment of the prospects for UK inflation over the following two years. Watch this closely as it’s the most important data release of the day.

We also have some important unemployment data today. Various measures of unemployment are a leading indicator for the UK Economy. If the rate is up, it indicates a lack of expansion within the U.K. labor market. As a result, a rise leads to weaken the U.K. economy. A decrease of the figure is positive (or bullish) for the GBP, while an increase is negative.

UK Trade Gap
In more poor news yesterday, the UK trade deficit widened more than expected in September, led by a jump in car imports as Britain’s scrappage scheme helped foreign carmakers. The difference between what the UK exports and what it imports was £7.2bn in September, well above analyst expectations of a £6.1bn deficit.

We are a trading nation and this reflects a return to growth for the global economy. The competitive value of the pound makes the UK well-placed to benefit from increased global demand, however it’s also to remember that we import much more than we export, and so the weak pound is bad news for most.

New Zealand
We have Retail Sales from NZ today. This measures the total receipts of retail stores. Monthly percent changes reflect the rate of changes of such sales. Changes in Retail Sales are widely followed as an indicator of consumer spending. An upward swing would help strenghten the NZD and cause GBP/NZD rates to fall.

Economic Growth
Major economies across the world are showing strong signs of recovery, the Organisation for Economic Co-operation and Development (OECD) has said. The OECD’s leading indicators “point strongly” to growth in Italy, France, the UK and China.

The Canadian and German economies are also displaying “tentative signals of expansion”, the organisation said. The report will provide some cheer for the UK, which is still stuck in its longest recorded recession.

While other major economies such as the US, France, Germany and Japan have all started growing again, the UK economy contracted by 0.4% between July and September. But the OECD rates the UK as one of just four major economies indicating expansion.

However, the fact remains that we are the only major economy still in recession, and despite the fact that forecasts suggest we will recover, it’s important to remember that the other major economies such as the EU and US are likely to recover faster. This will reflect itself in rates, as other currencies begin to strengthen before us, Sterling exchange rates are likely to struggle for some time to come.

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