Pound Sterling Forecast affected by Inflation and Credit Rating

Wednesday 15th February 2012
Good morning.Credit ratings agency Moody’s yesterday unnerved investors by warning it could cut the UK’s AAA credit rating due to weak growth, and also due to it’s exposure to the euro zone debt crisis. As the daily charts show below, this caused GBP/USD to drop significantly, and the GBP/EUR rate also fell, although not by as much.

~Currency Movements on Tuesday 14th February 2012~

Sterling falls on downgrade risks

Why has Pound Euro rate fallen Feb 2012? As mentioned above, the main reason for rate drop other than the UK QE programme and possible Greek bailout, is the credit warning given by Moody’s, that has weakened the Pound off slightly this week.

Losses have been limited somewhat however as this isn’t a huge surprise and had been a possibility for some time. Because of the strict government austerity measures that have contributed to a poor UK growth outlook, many in the market had been expecting this for some time. It is the first time the UK’s very good rating has been reviewed in a few years.

The reaction in the currency markets was less severe than in 2009 as several large developed economies including the United States and France have already been downgraded by ratings agency S&P in the last year. In fact so many countries have now been downgraded, it’s almost become meaningless and as such there was limited reaction, although rates have still dropped away.

“We are underweight sterling mainly versus the dollar. Some of what Moody’s are saying are things that have been bothering us for some time. It’s no surprise to us that the ratings agencies are catching up,” said Clive Dennis, head of currencies at Schroders. As well as issuing a warning on the UK, the agency said it may cut the credit ratings of France and Austria and downgraded six other European nations.

UK Inflation data eyes / BoE report

Of other note yesterday was the latest inflation figures for the UK. They came out exactly as forecast, but still showed a sharp fall in inflation. It showed 3.6% – last month it was 4.2%.

Despite being as forecast, the lower figures makes it easier for the BoE to make the case for further monetary easing, and in turn could weaken the Pound.

Today we will have the BoE inflation report, following policymakers’ decision last week to pump another 50 billion pounds into the economy to try to stimulate growth under its quantitative easing (QE) programme.

Other data today

We kick of the German GDP data at 7am, followed by a raft of UK data at 09:30am including Average Earnings, Unemployment, a BoE inflation report and a speech by BoE governor Mervyn King.

We will also see EU wide GDP and Trade Balance figures. In the USA there are some Industrial production figures followed by the Federal Open Market Committee (FOMC) minutes.

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