Forex Flash: UK growth seen as paramount culprit in downgrade – Westpac

There never really is a good day for a sovereign downgrade, however with the UK economy ending 2012 with a quarterly contraction of -0.3% as the Olympics boost dropped, the Bank of England recently voting 6:3 (versus 8:1) against a further £25bn of asset purchases and all the excitement surrounding the new Governor, the pound was always going to get hit on the news.

With last year’s concerns over the Eurozone fiscal crisis now very much behind us, the pound has been hammered on FX markets. Some are talking that having made a fortune in selling the ¥, the hedge fund community is starting to focus on the £. So is it a case of Moody’s Blues for the GBP?

According to the Westpac Strategy Team, “Moody’s statement suggests notes the primary concern about the outlook for the UK as growth – clearly this is one of the major concerns and we would tend to agree. Westpac expects growth of less than 1% over the next two years, constrained by European weakness, fiscal austerity, house prices that are slow to adjust lower and banks (and customers) reluctant to respond to policy initiatives like the BoE/Treasury’s funding for lending scheme.”