Sterling at risk after triple-A warning, outlook negative

Thu Dec 6, 2012 5:27pm IST

* Sterling close to flat versus euro, dollar

* Little reaction to BoE, ECB policy decisions expected

* Fitch warns on UK's triple-A rating

By Philip Baillie

LONDON, Dec 6 (Reuters) - Sterling steadied against the euro on Thursday but looked vulnerable after a gloomy autumn budget statement prompted ratings agency Fitch to warn that the UK could lose its prized AAA rating.

Strategists said moves in the pound against the euro were likely to be muted before the Bank of England (1200 GMT) and European Central Bank (1245 GMT) rate decisions.

"Both meetings today are set to be non-events so barring any major surprise where the ECB cuts rates, we could see euro/sterling lower, there are slight risks to the downside," said Geoffrey Yu, currency strategist at UBS Warburg.

The euro was flat on the day at 81.16 pence, having risen to a 5-week high of 81.47 pence on Wednesday.

Analysts said the pound could stay under further pressure after rating agency Fitch said Britain's credibility had been damaged by finance minister George Osborne's new forecasts, which showed the country would not meet a key debt reduction total.

"Fitch and Moody's have had gilts on negative outlook for a while so its is no surprise," Yu said. "If one of them downgrades the UK's triple-A status that probably not be the end of the world, but if it was two that might see some forced selling."

Fitch has a negative outlook on Britain's AAA credit rating and has said that it would review this again after Osborne's 2013 budget statement early next year, which some say is crucial.

"The triple-A rating is everything. It is what has supported sterling from selling off over the last few years and if that were to go you would see gilt yields rising and sterling dropping like a stone," said Christian Lawrence, currency strategist at Rabobank.

The pound was flat versus the dollar to $1.6109, close to a one-month high of $1.6131 hit earlier this week.

UK trade data showed Britain's trade deficit widened more than expected in October, although the pound showed a muted reaction.

TRIPLE-A SAFETY

Despite the flow of bad news about the economy, the BoE is widely expected to keep total of bond-buying in its stimulative quantitative easing policy unchanged at 375 billion pounds and interest rates on hold at 0.5 percent.

Most investors are also betting the ECB will keep rates on hold at 0.75 percent at its policy meeting on Thursday.

Market players will look for clues about whether ECB President Mario Draghi will show a greater willingness to cut borrowing costs in the future, which could knock the euro broadly lower.

That could see the pound higher against the single currency.

Analysts point to the fact that the pound is seen as a safe-haven currency against the euro, given the UK's triple-A status will also help the pound.

Citibank told clients in a note it expects the UK to maintain its triple-A status, given Osborne's deficit-busting programme is a credible solution.

"The Coalition government seems on course to deliver fiscal austerity comparable to the measures we see elsewhere in Europe," Citi said in a note. "As a result, sterling should continue to serve as a safe haven proxy for the euro.

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