THE marginal downgrade to the UK’s sovereign debt rating by one notch on the back of poor medium-term growth prospects had already been well anticipated in foreign exchange markets, as most participants had seen this coming and the downgrade is to a large extent already priced in. Sterling had already fallen to its lowest level against the dollar since July 2010 and is the lowest against the euro for some 15 months.

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Politically, however, this is also likely to cause some embarrassment for the Chancellor, ahead of the March Budget statement, in view of the importance he has attached to maintaining the top rating.

The impact on Sterling is however expected to be fairly modest from here on. After all both France and the USA have suffered from similar downgrades in recent times and the list of AAA rated countries is diminishing year by year.

So far as UK stocks are concerned some companies will gain from the competitive advantage of a devalued currency, namely those with overseas earnings or sales overseas, but exporters have been slow to take advantage of the lower currency with export sales up only marginally by comparison to say Germany and even Spain.

The question now is whether the equity market in the UK is due for some retracement of the gains made so far this year.

Equity market gains come on the back of central bank support, but uncertainty about the long term effect of this and whether it will continue could depress sentiment and the performance of the UK economy could soon be reflected in corporate earnings statements.

Inevitably, George Osborne will come under mounting pressure to change course and opt for more tax and spending cuts in next month’s budget.

: : Mark Marshall is a stockbroker at the Ipswich office of Charles Stanley & Co.

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