Sterling hits two-year low after Moody's UK downgrade

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The pound fell to a two-and-a-half-year low on Monday as traders ditched the currency at the first opportunity after the UK’s credit rating was downgraded.

Sterling dropped against the dollar to $1.5073, its lowest level since summer 2010, despite government efforts to play down the importance of the first ever loss of the UK’s AAA rating.

The pound also fell to a 16-month low against the euro at 0.8745p at one point. But the currency recovered against the dollar and the euro as trading went on.

George Osborne batted away Labour accusations that his economic policy has failed. The Chancellor told the House of Commons that the Government’s “economic credibility is tested every day by the markets”. He pointed to the UK’s record low borrowing rates as proof of market confidence.

“We have to convince the world that we can pay our way in the world,” he said. On Friday night Moody’s downgraded UK government debt by one notch from AAA to AA1. Traders said that the blow was softened because the decision had been expected and also because sterling has already fallen this year. “Sterling had already weakened aggressively in anticipation of this move and therefore this news was pretty much priced,” said Chris Towner from HiFX.

He added: “Unlike the downgrades of the US and France, which left these countries on negative watch, the UK has been put on a 'stable outlook’ which means another cut in the rating is not anticipated over the next 12 to18 months. This has perhaps helped ease the negativity.”

Analysts at Credit Suisse (NYSE: CRP-CL - news) said in a note: “In terms of fiscal policy, the politics of the downgrade makes any change from the current trajectory of fiscal consolidation in the March Budget unlikely. That said, it could well lead to further innovations in financial policy and associated credit easing measures in tandem with the Bank of England in order to stimulate activity.”

Figures from the US Commodity Futures Trading Commission show that hedge funds and traders increased their bets against the pound last week. Traders are also betting that the Bank may unleash further quantitative easing which would also cause the pound to fall.

Mr Towner from HiFX added: “The predators in the market will now be looking at sterling to see whether there is any more opportunity for weakness .”