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Pound drops to 16-month low versus Euro after Moody’s downgrade

Pound drops to 16-month low versus Euro after Moody’s downgrade

The pound slid to its weakest level in almost 16 months against the euro after Moody’s Investors Service cut the U.K.’s AAA credit rating, citing weakness in the nation’s growth outlook. Moody’s lowered Britain’s rating by one level to AA1 from AAA and changed the outlook on the nation’s debt to stable from negative. Credit rating downgrades have had little impact on other major countries such as the United States and France, but the former has the world’s reserve currency and the latter is supported by the European Central Bank’s pledge to do whatever it takes to bolster the euro zone. A big fall in the value of the pound would pose risks. Currency crises are inherently destabilising, and British consumers are already struggling to cope with high inflation while their wages only inch up. Higher prices for imports would add to the pain.

Meanwhile, Italians are voting for the first time since Europe’s financial crisis ushered in unelected leaders who imposed an austerity program. Incumbent Mario Monti and front-runner Pier Luigi Bersani of the Democratic Party have vowed to maintain budget rigor, while candidates Silvio Berlusconi and Beppe Grillo have promised to overturn tax increases. A weak government could usher in new instability in the euro zone’s third-largest economy and cause another crisis of confidence in the European Union’s single currency.

On the FX markets, after weeks of speculation, Moody’s finally cut UK’s government bond rating to AA1 from AAA. The ratings agency cited continued weakness in UK’s medium-term growth outlook, adding that it sees sluggish growth extending well into the second half of the decade. Given that the profile of the UK’s debt looks set to go through 100% in coming years, which is considerably higher than most other top credit rated nations, the decision to strip the country off its much prized AAA rating should not be viewed as a surprise. Nevertheless, this is unlikely to do GBP any favours after the trade weighed sterling index fell to near 16-month low last week. In terms of technical levels, supports are seen at 1.5236 which is the 21DMA lower Bollinger level, followed by the Feb-21st low at 1.5130 and then at 1.5125 which is the July-21st 2010 low. On the other hand, resistance levels are seen at 1.5544/50 and then at the 21DMA line at 1.5606.

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