Pound Weakens Against Euro, Dollar as Fitch Lowers U.K. Rating

The pound fell, extending its third weekly loss against the euro, as Fitch Ratings lowered the U.K.’s credit grade by one step, citing the nation’s weak economic outlook.

Sterling weakened against all but two of its 16 major counterparts as a central bank report today showed U.K. lending to companies dropped in February. Fitch cut Britain’s credit rating to AA+ from AAA with a stable outlook. U.K. government bonds were little changed, leaving 10-year yields within one basis point, or 0.01 percentage point, of the lowest in a week.

“The main takeaway is that there hasn’t been a big reaction in the pound,” said Neil Jones, head of hedge fund sales at Mizuho Corporate Bank Ltd. in London. “It isn’t a surprise. Obviously you don’t want to see it happen, but I don’t expect to see investors exiting the U.K.”

The pound depreciated 0.4 percent to 85.78 pence per euro at 6:04 p.m. London time, leaving it 0.4 percent weaker since April 12. Sterling fell 0.3 percent to $1.5233, down 0.7 percent in the week.

The pound has dropped 4.2 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, amid speculation the central bank will expand stimulus measures. The euro advanced 1.9 percent and the dollar gained 3 percent.

BOE Target

“The downgrade of the U.K.’s sovereign ratings primarily reflects a weaker economic and fiscal outlook,” Fitch analyst Gergely Kiss wrote in e-mailed report today. “Despite the loss of its AAA status, the U.K.’s extremely strong credit profile is reflected in its AA+ rating and stable outlook.”

The Bank of England maintained its asset-purchase target, or so-called quantitative easing, at 375 billion pounds on April 4. Policy makers also kept the key interest rate at a record-low 0.5 percent this month.

Governor Mervyn King was defeated for a third month in his push for more stimulus, minutes of the meeting published on April 17 showed. Six of the nine Monetary Policy Committee members voted to keep the target unchanged.

Net lending to companies dropped by 2.8 billion pounds after a 300 million-pound decline in January, the central bank said in its Trends in Lending report today.

Data yesterday showed March retail sales including fuel fell 0.7 percent from a month earlier.

‘Further Easing’

“The door is open to quantitative easing so sterling should be on the back foot,” said Jane Foley, senior currency strategist at Rabobank International in London. “We had that retail sales data yesterday and it was weak. We had minutes of the MPC meeting this week and the door has been left open to further easing.”

The 10-year gilt yielded 1.66 percent after falling to 1.657 percent yesterday, the least since April 8. The price of the 1.75 percent bond due in September 2022 was at 100.76.

Ratings changes are proving to be less important to investors, with yields on sovereign securities moving in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December.

The 10-year yield has fallen 45 basis points since Moody’s Investors Service reduced Britain’s credit rating to Aa1 from Aaa on Feb. 22.

U.K. gilts earned 1.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds and U.S. Treasuries returned 0.8 percent.

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