Pound Euro Exchange Rate (GBP EUR) In Peril Following UK's AAA Credit Downgrade

Published: Monday, 25 February 2013 09:00 BST - Written by John Cameron

STORY LINK Pound Euro Exchange Rate (GBP EUR) In Peril Following UK's AAA Credit Downgrade

For some months now, a dark and threatening cloud has hung over Britain. All three of the world’s leading credit ratings agencies placed the UK on ‘creditwatch’ during the latter part of 2012, meaning that there was a realistic chance that she would lose her highly-valued AAA credit rating. Late last Friday, after the European equities session had ended, one of the three broke rank and announced that it was downgrading British sovereign debt to AA1, leaving Germany and Canada as the only major economic powers to retain a AAA rating.

Friday’s announcement by Moody’s Investor Service that it was cutting its assessment of the UK’s creditworthiness by a notch was accompanied by a doom-laden statement which suggested that economic activity would ‘remain sluggish’ in Britain for several years to come.

The UK’s coalition government tried to put a positive gloss on the release, pointing out that France and the USA had weathered similar downgrades well and had not had to pay significantly higher rates of interest in order to service their national debts via the bond market. However, these words appeared hollow in the light of comments made by British Prime Minister David Cameron during a television interview in the first weeks of last month. Cameron described it as ‘hugely important’ that the UK retained its ‘AAA’ credit rating so that his government could continue to access the relatively cheap credit needed in order to service its £1trillion+ national debt. Yesterday’s protestations by Cameron’s ministers that this was no longer the case are unlikely to convince institutional investors who may well feel that they ‘protesteth too much’.

The announcement by Moody’s came just before Friday’s weekend currency market shutdown. Investors’ immediate knee-jerk reaction was predictably Sterling-negative. The news broke at 2132hrs GMT at which time the Pound Euro exchange rate (currency : GBP EUR) was trading at 1.1566. By the market close, which came less that 30 minutes later at 2200hrs, the pair had traded down to 1.1494. It appears highly likely that there will be further pronounced selling pressure on the Pound throughout today’s session, with a break below last Wednesday’s 16-month low of 1.1409 looking highly likely for GBP EUR.

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