Sterling at risk after rating warning, outlook bleak

Thu Dec 6, 2012 2:46pm IST

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* Sterling close to flat versus euro, dollar

* Investors focus on BoE, ECB policy decisions

* 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 ahead of Bank of England and European Central Bank rate decisions later in the session.

The euro was close to flat on the day at 81.14 pence , having risen to a one-month high of 81.47 pence on Wednesday.

Analysts said the pound could come 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.

"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.

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.

The pound edged up 0.1 percent versus the dollar to $1.6107, off a one-month high of $1.6131 hit earlier this week.

"We see sterling as a little rich at these levels against the dollar, and still also see risks of euro/sterling gains on squaring of short euro positions," Lloyds analysts said in a note.

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.

Before that traders will focus on UK trade balance data for October due at 0930 GMT. Analysts said the trade deficit is expected to widen but the figures were unlikely to move sterling substantially.

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