It was in late November that the Office for Budget Responsibility in the UK downgraded its forecasts for growth in the economy and said that the government's plan to cut its budget deficit would take longer than originally estimated.

From MarketWatch: The OBR now projects 2011 economic growth at 0.9%, down from its March forecast of 1.7%. The outlook for 2012 growth was slashed to 0.7% from 2.5%, while the economy is now expected to expand 2.1% in 2013 versus an earlier estimate of 2.9%. The OBR's latest economic and fiscal outlook sees public sector net borrowing at 8.4% of GDP this year, slightly higher than forecast in March. The OBR expects PSNB to have fallen to 2.9% of GDP by the 2015-16 financial year, versus a March forecast of 1.5%


The report caused a pretty big stir in UK economic circles and the GPB/USD pair extended its decline from November after having rallies to the 1.5750 area to begin December (see chart at bottom of article).

Since then the market has been preoccupied with the funding crisis in Europe and we had first the Federal Reserve opening up dollar swap lines at cheaper rates and then today's ECB action in which it lent the largest amount ever to banks in a single operation.

The prospect of weaker than expected growth will keep the Bank of England in a dovish stance with many economists forecasting the MPC to increase its bond purchase program once the current £75 billion of bond purchases runs out in February. The minutes released earlier today said that some members believe there will be a need for more asset purchases in due course.

From Financial Times: We still expect the MPC to make £50bn of purchases over the three months from February to May and another £25bn from May to August, said Philip Rush, an economist at Nomura.

Moody's Takes A Swipe at UK Credit Rating

That has kept the United Kingdom mainly out of the headlines - except for Cemeron's veto at the EU Summit and the diplomatic blowup that caused - and today session we see important story that also remain mainly under the radar - Moody warning in its annual review that Britain AA credit rating may be in danger if the country faces an adverse shock.

From Financial Times: Britain's deteriorating public finances and growth outlook have substantially reduced its ability to maintain its triple A credit rating, Moody's, the credit ratings agency warned on Tuesday evening in a shot across the coalition government's bows... Moody's made it clear that the deteriorating UK domestic outlook, not just a potential eurozone break-up, was important in its assessment.

Growth shortfalls of the kind outlined by the OBR are clearly credit-negative and have greatly reduced the sovereign's ability to absorb further fiscal or economic shocks without this having rating implications, the report concluded.

The news is a blow to the Prime Minister Cameron and Chancellor of Exchequer Goroge Osborne as they have argued that the austerity measures undertaken by the UK ruling coalition meant that UK assets and bonds were a rock of stability among the euro-zone sovereign debt crisis across the channel. Therefore this development - the potential for losing its AAA credit rating - may undermine some of the appeal of UK bonds as a safe haven asset.

Recently the head of the French central bank took a swipe at the UK debt profile as well, saying that if France was due for a credit downgrade that the UK should be downgraded as well.

Here is a handy graphic of the two countries and Germany in terms of the key debt metrics:


Some Comfort for Osborne on Nov. Gov't Borrowing Figures

width=405In today's session we got our latest look at government borrowing figures and they may have help ease some of the pressure on Mr. Osborne as the borrowing figures were an improvement compared to the readings last year, mainly on the back of a rising tax receipts.

From The Telegraph: Net borrowing excluding public sector interventions fell last month to £18.09bn from £20.36bn in November last year, according to the Office for National Statistics (ONS). This was below economists' average forecast of £19.6bn.

The fall in borrowing was driven by higher tax receipts amid the new levy on banks and the increase in VAT to 20pc. That leaves the Government broadly on course to meet the full-year borrowing target of £127bn set by the Office for Budget Responsibility.

GBP/USD to Head Back Towards December's Lows


Despite the positive borrowing report, if the UK economy is faced with a significant shock, it will undoubtedly put further strain on their countries credit rating and it might join the club of European nations in line to lose their top AAA credit rating. That could mean that the rally we had seen recently in the GBP/USD pair may fall short around 1.5775 (which is where was rejected in today session for a third time last month) or around the 200-ema and 61.8% retracement of the November downswing near 1.5865.

Combining the concern about its credit rating, the prospect of more quantitative easing, the weak outlook for domestic growth, and the possibility of the fallout from Europe, it does suggest that the pound may be looking to retest its lows from December near 1.54 against the greenback if not its lows for the year near 1.5275 after its current counter-trend move stalls out.

- Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.