Sterling Resilience Trumps S&P Outlook Cut

Sterling fell around two cents in response to the S&P cut in the UK's sovereign outlook from stable to negative due to its rising debt as a percentage of GDP. However, the real take away does not seem to be sterling's hit, but its relatively quick recovery. Consistent with the other major European currencies, the pullbacks have been brief and mostly shallow, suggest the upside remains the path of least resistance. Sterling held support near $1.55, which is just above the 5 day moving average (~$1.5491), which has buoyed sterling in recent days.

The high since the low was set is about $1.5710, which is just a tad more than 61.8% retracement of the S&P inspired decline. Short-term technical indicators do not rule out further recovery upticks, though the $1.5800 area may prove too far today. Support is seen near $1.5600.

Note that sterling was already rebounding well before Moody's came out with its affirmation of the UK triple A rating and stable outlook, noting as it has done in the past, that the UK government can absorb the new debt obligations and improve its fiscal position "over time". The third of the top three rating agencies, Fitch, also affirmed the UK's AAA rating and stable outlook. Some observers claim that S&P decision was politically motivated but there is of course no evidence nor a compelling narrative. More likely simply different economists drawing different conclusions.

A number of European countries have already been downgraded: Ireland, Greece, Portugal and Spain. There continues to be talk of risk to that the US could face a downgrade. We see little signs that the rating agencies are considering such a move.
Sterling Resilience Trumps S&P Outlook Cut Sterling Resilience Trumps S&P Outlook Cut Reviewed by magonomics on May 21, 2009 Rating: 5
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