After a steady increase for the pound against most currencies, yesterday saw a dramatic fall. Sterling has since recovered slightly, but lets take a quick look at what's caused the fall in the pounds value.
UK's Credit Rating
Yesterday Standard and Poors, a UK credit rating agency downgraded the UK's status from stable to negative. This is the first time this has happened since the ratings started over 30 years ago.
In real terms, this means it will be more expensive for the UK to borrow money, something the government has been doing in spades reccently. The higher cost of borrowing then means government spending is increased, and thus taxes also will have to rise. Reducing the debt we have is something that no-one knows how will be achieved at the moment, with the chancellor Alistair Darling clinging on to his optimistic growth forecasts as an answer. These forecasts are way off what the IMF and leading anaylsts say.
What this means for currency
The pound fell instantly against the dollar by over 3 cents, and also fell against the Euro. The pound has weakened because investors are worried about the UK's level of debt. Currently this is more than 50% of GDP, with some forecasts saying it will be 100% of GDP by 2013. This does not bode well for the future value of Sterling.
Basically the Standard and Poors report just said what the IMF said the day before, in a slightly different way. The important thing to consider is that both are way off what the government itself is forecasting. Currently rates are still not that far from year highs, and with massive uncertainty in the UK economy and the pounds future, consider protecting yourself from the market dropping with a Forward conract.
Today's data
we have GDP data for the UK at 09:30am this morning. This will be extremely important. Analysts expect the monthly figures to be -1.9% and the yearly figure to be -4.1%. Any difference in these figures to the downside will likely result in another nosedive for the pound.
We also have some Retail Sales data from Canada, and a speech by the US Fed Chairman, so volatility for CAD and USD are possible today also.
Any client that needs to purchase foreign currency with Sterling, should consider fixing a rate before this data to protect against a possible downturn. To open an account with us for free to obtain live currency quotations, please click the orange banner below.
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