By TraderVox.com
The markets were in a relatively bad mood yesterday. This was as a result of Moody downgrading the credit ratings of several European countries including Spain and Italy. Luckily despite the bad moods the markets didn’t react in the worst possible manner and attentions shifted to Moody, decision to give the United Kingdom a negative outlook. This does not speak well of the economic prospects of the united kingdom in the nearest future giving its AAA rating.
Moody defended that the United Kingdom had very weak macroeconomic conditions and expressed lack of complete faith in the British Governments implementation of its austerity programs and its efforts in cutting down its deficit. They also added that severely diminishing demand from other European countries for UK goods (note that they are UK’s main trade partners) would seriously affect the UK trade industries.
Analyzing further, Moody remarked that among the AAA countries left, UK had the largest debt.
Moody therefore concluded that the AAA- rating of the United Kingdom is at serious risk. The thought of what will happen to the GBP in the event of a downgrade is something that no one wants to even imagine.
Possibly that is why we witnessed a sharp drop in GBP/USD yesterday…
GBP/USD dropped a massive 55 pips just two hours into Moody’s announcement and has been heading for the 1.5700 support ever since.
We are awaiting a swift reaction from the British government as their immediate actions will now be scrutinized heavily.
U.K. Chancellor George Osborne was quick react, saying that the warning not only supported the government's ongoing programs, but is also a "reality check for anyone who thinks that the U.K. can duck its debts."
For now a warning from Moody's means that the U.K.'s rating could be downgraded in the next 12 to 18 months. Also, many are now speculating that S&P and Fitch may follow suit and warn the U.K. of a downgrade.
For now however the GBP is safe after yesterday’s drop.
Article provided TraderVox.com
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