Pound Left Vulnerable After Credit Rating Downgrade
The pound has actually made gains against the Franc today despite the UK losing its triple A credit rating over the weekend. Credit ratings agency Fitch announced over the weekend that it had downgraded the UK’s credit rating from triple A to AA+, the second ratings agency to do so. The news came as a blow to George Osborne, who had been proud of defending Britain’s top rating since he took office as Chancellor of the Exchequer in 2010. Fitch cited a ‘weaker economic and fiscal outlook’ as justification for stripping the UK of its gold-plated rating.
This Office for National Statistics will announce its estimate for first quarter UK GDP on Thursday. It’s expected that they will announce marginal growth of 0.1% although some analysts are forecasting a contraction in light of the recent poor run of economic data releases. If we see another quarter of negative growth the UK will technically be back in recession, which will significantly weaken the pound. However, if we see positive growth it’s likely that the pound will strengthen and we may well see GBP/CHF rates head back towards the 1.45 level.
Unfortunately, with so much uncertainty, it is almost impossible to forecast which way the rates will head in the near term. The forecasts are varied, with some analysts expecting GBP/EUR to be pushing 1.20 again in the near term and others suggesting that we may well see rates as low as 1.10 over the coming months. It seems the problems in Cyprus have now been patched over but more worrying signs from the eurozone have begun to emerge. This morning Germany posted much worse than expected manufacturing data. Considering the size of the German economy, accounting for approximately 30% of eurozone economic activity, signs that they may be struggling are worrying. If the economic situation in Germany worsens we can expect to see a significant weakening of both the euro and the franc. Angela Merkel must be quaking in her Lederhosen.
Over in Switzerland, selling pressure on the franc has generally been limited by the weak yen and speculation that the ECB may be heading towards another rate cut. Of course, the SNB are keen to keep the franc weak to aid competitiveness but safe-haven inflows are not helping matters. These three don’t seem to be too concerned though. With views like that, can you blame them?
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