Sterling fell to its lowest in more than a week against the euro on Friday after Standard & Poor's lowered its outlook on UK government debt to negative, putting the UK's prized triple-A rating at risk. The euro rose 0.2 percent to 81.395 pence, its highest since December 5. Further gains could see it target the high reached on that day of 81.47 pence.
S&P said late on Thursday it saw a one-in-three chance that Britain will be downgraded in the next two years. Analysts said the pound's losses were limited as S&P's outlook was in line with that of fellow ratings agencies Fitch and Moody's. But any evidence of UK economic weakness in coming weeks could reignite concerns about the prospect of a downgrade.
"Market sentiment (towards sterling) remains relatively heavy after S&P changed the UK's outlook to negative," said Garen Ovsepyan, managing member at currency hedge fund SHARPE + SIGNA, which has assets under management of $80 million. The pound was up 0.2 percent at $1.6144 against the dollar, though it was well below a six-week high of $1.6173 hit on Wednesday. It was expected to struggle to rise much above there given chart resistance at $1.6176 and $1.6178, highs hit on November 1 and October 17.
"Our weekly cyclical model indicates a structural weakness in cable (sterling/dollar) ... It has rejected the $1.6180 level now three times since 17th October, which points to a bleak outlook at least for the coming week," said Ovsepyan. Falls against the euro pushed the pound to a nine-day low against a basket of currencies, with its trade-weighted index dropping to 83.5.
But unless the risk of a UK downgrade is seen as increasing, or if the Bank of England looks likely to opt for more monetary easing, analysts and traders said the pound would continue to be driven mostly by developments in the dollar and the euro. "Sterling has not been moving on its own steam for a while. We await further UK data. The Bank of England will probably sit on the fence until data forces them to act," said Richard Wiltshire, chief FX broker at ETX Capital.
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