June 8, 2011 / 10:57 AM / 8 years ago

Sterling slips as Moody's warns on UK outlook

* Sterling hits 1-mth low vs euro; 90 pence per euro in view * Moody’s analyst reported saying UK’s AAA rating at risk

* Agency confirms its outlook on UK is stable

* Eur/stg seen supported ahead of Thursday’s ECB meeting

By Jessica Mortimer

LONDON, June 8 (Reuters) - Sterling fell to a one-month low against the euro and slid against the dollar on Wednesday after Moody’s rating agency warned of a risk to the UK’s top-notch debt ratings if weak growth hampers plans to cut the deficit.

The euro rose to 89.76 pence EURGBP=D4, taking it beyond the previous day’s one-month high of 89.45 pence and leaving it on course for a test of the psychologically key 90.00 pence which has proved stiff resistance in the past.

Moody’s said its outlook for Britain remained stable, but weaker growth and slippage in the government’s fiscal plans could lead to a reassessment. [ID:nLDE7570KF]

Earlier, a media report quoted a Moody’s analyst saying the UK was at risk of losing its AAA rating, which triggered the initial sharp falls in the pound. [ID:nLDE7570E4]

“Sterling saw a knee-jerk fall on the Moody’s comments,” said Richard Wiltshire, chief FX broker at ETX Capital.

“The euro spiked up to 89.75 but then came off as it dawned that there was nothing concrete behind these comments and no time frame mentioned”.

By 1034 GMT, the euro pared gains to trade at 89.35 pence, up 0.1 percent on the day. Beyond 90.00 pence, the next target will be the early May high of 90.43 pence.

The euro was expected to remain supported ahead of a European Central Bank meeting on Thursday.

The ECB is forecast to leave rates on hold at 1.25 percent but to signal a rate rise in July. This would further widen yield differentials between the euro zone and the UK, where rates are 0.5 percent and not expected to rise this year.

“The ECB will probably be on the hawkish side, which leaves room for the euro to move above 90 pence,” said Simon Smith, economist at FXPro.

Against the dollar, sterling GBP=D4 was down 0.4 percent at $1.6379, having hit a session low of $1.6355. It has support at its 55-day moving average at $1.6328 and remains hemmed in a range above last week's low of $1.6301 and below the May 31 high of $1.6547.

The BoE on Thursday is expected to leave rates on hold. This is seen having little or no impact on markets given that details of the policy debate will not be known until the minutes are released in two weeks’ time.

FXPro’s Smith said it was possible that at least one of the two Monetary Policy Committee members who have recently voted for a hike — Martin Weale and Spencer Dale — may have revised their views due to recent weak UK data.

Markets are not fully pricing in a BoE interest rate hike until March next year. BOEWATCH ICAPSONIA

Adding to concerns about a slowing recovery in the British economy, a survey on Wednesday showed recruiters filled permanent and temporary vacancies at the slowest pace in seven months in May. [ID:nLDE7561IT]

It followed figures on Tuesday showing an unexpected fall in UK retail sales and weak housing figures for last month. [ID:nLDE7560FD] [ID:nL9E7F600L]

The fragility of Britain’s economy is holding the BoE back from raising rates even as inflation risks remain stubbornly high.

Editing by Toby Chopra

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