-- Sterling's resilience is wavering as the economic data continues to
disappoint
-- Expectations growing that BOE will provide more stimulus
-- U.K.'s triple-A credit rating in focus
By Eva Szalay
Sterling's resilience in the face of weak economic data could soon
end, analysts say, as investors grow increasingly skeptical about the
pound's credentials as a triple-A haven from the euro-zone crisis and
as expectations for more stimulus from the Bank of England gain
momentum.
The U.K. currency has benefited from strong capital inflows from
investors seeking to avoid the stresses of the euro-zone debt troubles
since the start of the year, even though the 17-country bloc is
comfortably the U.K.'s biggest trading partner. The pound last month
even hit its strongest level against the euro in more than 3-1/2
years.
But with data Wednesday indicating a deepening slump in U.K.
manufacturing in July after preliminary figures last week showed the
U.K. economy contracted by an unexpected 0.7% in the second quarter,
some analysts are now upping their expectations for more BOE easing
this year, which could add to the pressure on the currency.
"Following the very weak second-quarter gross domestic product number,
[our economists] now expect a further 50 billion pounds (about $78
billion) of asset purchases and a 25-basis-point cut in the [bank's
benchmark interest] rate, both to be announced in November," Barclays
analysts said in a note to clients.
Some market participants, though a minority, expect something even sooner.
Interest rate markets are now pricing in a chance of more than 20%
that the U.K. central bank will halve its key rate to 0.25% at its
meeting Thursday.
"We continue to suggest that [selling sterling against the dollar] is
the most attractive way of trading the pound for now," Barclays said.
That could be precisely what the U.K government is seeking--a weaker
pound to help stimulate exports and generate some much-needed growth,
while also enabling the government to stick to its pledge to bring
down debt.
But sterling's prospects are also clouded by the decision by ratings
firm Moody's Investors Service on Wednesday to cut its U.K. economic
growth forecast, while maintaining a negative outlook on the country's
triple-A credit rating, much like rival Fitch Ratings but in contrast
to Standard & Poor's, which last week affirmed a stable outlook.
"In our view the Moody's announcement highlights the fact that the
risk of a U.K. downgrade has increased following the latest batch of
very weak data out of the U.K.," said Citigroup in a research note.
Data Tuesday also showed a steep rise in U.K. government bond sales by
overseas investors.
Foreign-exchange strategists say the U.K. government's program of
fiscal tightening has been a key reason why the country has so far
survived the raft of credit downgrades seen on both sides of the
Atlantic in recent years. That program is also an important factor
behind the pound's resilience, they say.
Against the dollar, sterling is still about 10% stronger than it was
at its lowest point in May 2010, when the current coalition government
took office pledging to rein in a ballooning public-sector budget
deficit.
But with the U.K. economy now potentially entering a fourth
consecutive quarter of contraction, sterling could become more
sensitive to weak economic data as the risk of delays to the
government's austerity targets grows, which in turn could spur
speculation about the U.K. government's tenuous hold on its triple-A
credit rating.
"We suspect that any potential U.K. rating action in coming months
will reduce the attractiveness of sterling as a safe-haven alternative
[to the] euro," Citigroup said.
Write to Eva Szalay at eva.szalay@dowjones.com
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(END) Dow Jones Newswires
August 01, 2012 10:24 ET (14:24 GMT)
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