U.K. ratings downgrade to weigh on pound

SAN FRANCISCO (MarketWatch) � The British pound will face continued pressure in the coming weeks as confidence erodes in the United Kingdom�s recovery efforts following the loss of the country�s triple-A rating, according to analysts.

The British pound GBPUSD �fell sharply to below $1.517 from around $1.525 late Friday following Moody�s U.K. ratings downgrade to Aa1 from Aaa. The pound had surged briefly past the $1.53 mark before the announcement on Friday from $1.515 on Thursday after touching an intraday high of $1.55 on Tuesday.

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A wide mix of events is likely to buffet markets, including Ben Bernanke's testimony that might clarify U.S. Fed policy, Italy's very uncertain elections and the appointment of a new Bank of Japan governor.

In its rationale for the downgrade, Moody�s said U.K. economic growth will remain �sluggish� over the next few years compared with past recoveries in the 70s, 80s, and 90s.

�The sluggish growth environment in turn poses an increasing challenge to the government�s fiscal consolidation efforts, which represents the second driver informing Moody�s one-notch downgrade of the U.K.�s sovereign rating,� Moody�s said in its note.

Expect the pound to trade in the $1.40 to $1.50 range over the next couple of months as the U.K.�s medium-term growth outlook remains weak, said Mansoor Mohi-uddin, head of foreign exchange strategy at UBS Macro Research, in a note.

�We think the pound is undergoing a similar devaluation to what the yen has experienced over the last few months,� Mohi-uddin said.

HSBC retained its 2013 year-end forecast of $1.48 for the pound. The British middle-ground plan of �[b]orrow initially to stimulate U.K. growth, providing the platform for the austerity programme thereafter� appears not to be working as the Moody�s downgrade suggests, HSBC said in a note.

�The markets will not enjoy the kind of clarity and comfort that policy provided in the past,� HSBC said. �Indeed, the proposed path of year after year of a sizeable fiscal drag, unprecedented in U.K. modern economic times, always looked challenging.�

Reuters George Osborne, Britain's chancellor of the exchequer.

U.K. Chancellor of the Exchequer George Osborne said the Moody�s downgrade will not deter the country�s current economic strategy as he faced criticism that he fell short of his 2010 vow to retain the country�s AAA rating. Read more on Osborne reaction to downgrade.

The Federation of European Employers was quick to point out that Osborne could have avoided the downgrade had he focused more on growing the economy by cutting corporate taxes to stimulate manufacturing.

�The downgrading of the U.K.�s credit status is a blow for the U.K. as a leading financial centre and the U.K. balance of payments is so reliant on its financial services that even a small loss in trading income could affect the value of Sterling and have a major impact on GDP,� said FedEE Secretary-General Robin Chater in a statement.

�Regaining international confidence by further government spending cuts is going to take far too long to affect the economic fundamentals and could harm public confidence if it reduced the quality of public services,� he said.

The pound also fell against other currencies. Against the euro GBPEUR , the pound was down to �1.147, compared with being just above �1.156 before the downgrade.

Against the yen GBPJPY , the pound traded at �141.66 compared with �142.48 before the downgrade.