Moody’s soured the markets yesterday, as it downgraded six European nations including Spain and Italy.
However, it seemed the markets weren’t too concerned with the downgrades, but rather, were more focused on Moody’s decision to slap the United Kingdom with a negative outlook.
Yes, that’s right, the United Kingdom. Home of Yorkshire pudding, David Beckham, and a triple-A rating.
According to Moody’s, weak macroeconomic conditions could undermine the British government’s efforts in implementing its austerity programs and slashing its deficit.
Weak demand from European countries, many of whom are the U.K.’s largest trading partners, would severely hamper the U.K.’s trade industries and send it into a deeper rut.
Furthermore, the rating agency also pointed out that amongst all AAA-rated nations, the U.K. had the highest level of debt.
This made Moody’s the first of the Big Three (Fitch and S&P are the other two) to warn that the U.K.’s previous standard may be at risk. This is quite interesting, as normally S&P takes the lead in sending out warnings, while Moody’s has traditionally been more conservative.
Perhaps that’s why we saw a sizeable drop in GBP/USD yesterday…
If we take a look at Cable’s 1-hour chart we can see that the pair broke yesterday’s intraday support and dropped by as much as 55 pips in the first two hours after Moody’s announcement.
GBPUSD even broke last Friday’s low, and is now heading for the 1.5700 major psychological handle!
As much as we like looking at charts though, many are also wondering how Moody’s warning will affect the British government’s actions moving forward.
U.K. Chancellor George Osborne was quick to hit the news wires, saying that the warning not only supported the government’s austerity-related programs but is also a “reality check for anyone who thinks that the U.K. can duck its debts.”
For now, a warning from Moody’s means that the U.K.’s rating could be downgraded in the next 12 to 18 months. Also, many are now speculating that S&P and Fitch may follow suit and warn the U.K. of a downgrade.
Still, a warning will just be a warning until somebody starts talking of actually downgrading the economy. For now, though, all eyes will be on Osborne and his teams and whether or not they can reign in the country’s debts.