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Moody’s Downgrade the UK and Elections Begin in New Zealand, Germany

US ratings agency Moody’s has downgraded the UK’s credit rating from Aa1 to Aa2 over concerns for the future of the UK’s public finances. The ratings outlook is now “stable”, from “negative”. Moody’s stripped the UK of its AAA rating back in 2013.

“The outlook for the UK’s public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned, with the government’s fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise,” Moody’s said in a statement on Friday.

The agency added that “fiscal pressures will be exacerbated by the erosion of the UK’s medium-term economic strength that is likely to result from the manner of its departure from the European Union.”

In a rebuttal, the UK government said that Moody’s assessment was “outdated” and that it failed to take account of Prime Minister May’s speech on Friday, in which she “set out an ambitious vision for the UK’s future relationship with the EU” and “[made] clear that both sides will benefit from a new and unique partnership.”

Sovereign ratings are important because they affect the cost of financing a country’s current account deficit. In 2016, the UK’s deficit widened to 4.4% of GDP, ranking it as the worst among G12 countries.

The news of the downgrade broke with just half an hour of the trading week remaining and with many dealers already at home, so the impact on sterling exchange rates will not be fully known until Monday.

Within the time that it had, sterling did fall sharply however. GBP/USD plunged 0.5% within seconds from 1.3525 to 1.3455 before retracing that entire move and then falling again minutes later to 1.3450. In the minutes leading up to the New York close, markets regained their composure and ‘cable’ settled at 1.3491; down 0.7% on the week.

It remains to be seen how sterling reacts on Monday, but with five trading days of September remaining, Britain’s currency is on course to have its best month in more than seven years against the dollar and its best in ten months against the euro. Sterling is up by more than 4% in September against both currencies.

GBP/USD 3 Month Chart

Sterling has soared in recent weeks following what appears to be signals from the Bank of England for an imminent UK rate hike.

At the most recent meeting of the BoE, Governor Mark Carney said that an increase in UK interest rates would be appropriate “in the coming months,” and a day after that meeting one of the BoE’s most dovish committee members, Gertjan Vlieghe, solidified expectations for a hike when he said that “we are approaching the moment when [the] rate may need to rise.”

Recent movements in the pound are embarrassing those who publicly predicted the worst for the British currency, such as Guy Petcho of Voya Investment Management, who told Reuters in July that GBP/USD was set to fall into the $1.10s by year-end, and veteran investment advisor Beat Wittmann, who said in June that a big fall was coming in the second half of the year.


National Elections

General elections take place this weekend in New Zealand and Germany.

In Germany, it is a near certainty that Angela Merkel will become German Chancellor for an historic fourth term – bookmarkers price this at 1/50 – and therefore little action in the euro is expected.

Preliminary results of the German election are likely to be available in the hours after the polls close but official results won’t be announced until Tuesday.

Much harder to call is Saturday’s New Zealand election. Momentum has swung this year from the incumbent National Party to the opposition Labour Party, and back to the Nationals. The most recent poll had the Nationals leading by nine points. It is likely that the New Zealand dollar will receive a short-term boost on a National victory and decline if Labour take charge. Polls close at 7pm in New Zealand.

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Categories: EUR, GBP, Markets, NZD, USD
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