UK optics are poor - BBH

Analysts at BBH suggest that UK optics are poor as the same day that Prime Minister May gave her most important speech on Brexit in a year, Moody's cuts the UK's sovereign rating.  

Key Quotes

“The substance of the developments was considerably better than what it appears.”

“First, since the start of the year, Moody's identified September 22 as the date that it would announce its rating review of the UK, which it had put on negative outlook following the referendum.  Either May's office was not aware of this, or it did not matter.  The bad optics could have been avoided.”

“Second, Moody's downgrade is a catch-up move, not a leading move.  That is to say that Moody's new Aa2 rating simply brings it into line with the other two major rating agencies, S&P and Fitch, both of whom had cut the UK's rating following the referendum.  Moody's only changed its outlook then.  Both S&P and Fitch have negative outlooks on their UK ratings, while Moody's credit cut was followed by a return to a stable outlook.”

“May's speech itself points in the other direction.  It may not have been a major turning point, but May's speech was a step forward.  The evidence is what the chief EU negotiator, Barnier, said ("constructive spirit").  It is important that the first step is followed up by another at the new round of negotiations that begin on September 25.  The Tory Party Conference begins October 1.  It could be harder for May than the negotiations with the EU.”

“Sterling is consolidating the gains scored in the adjustment to the more hawkish than expected Bank of England.  A shelf was carved last week near $1.3450.  A break may signal another cent loss.  Recall that the $1.3430 area corresponded to the 50% retracement of sterling's decline since the referendum.  With the convincing break, the next retracement objective is near $1.3800, and other technical levels come into play near $1.3880.”

“On the other hand, the euro has carved out a shelf in the GBP0.8775 area as well, as the pullback from GBP0.9300 seen in late August runs out of steam.  A move above GBP0.8900 is needed now to signal anything important.  The euro needs to retake the GBP0.9100 area, but ideas the BOE could hike rates as early as November, while the ECB signals a gradual, cautious tapering next month (for 2018) may stand in its way.”