UK Suffers Blow, Pound Seen Under New Pressure

Why a UK Downgrade Wouldn't Be a Big Deal
Kimberley Coole | Lonely Planet Images | Getty Images

The U.K. suffered a new blow on Friday after Moody's downgraded the country's triple-A rating by one notch to AA1, citing weak growth and the country's rising debt burden.

The cut is a blow to the Chancellor of the Exchequer George Osborne, who has stuck to his plan to reduce government spending in the face of slowing economic growth. The opposition Labour party called the downgrade a "humiliating blow" and asked the government to kick-start the "flat-lining economy", according to the BBC.

The pound,which has already come under pressure this month, falling to a two-and-a-half year low against the dollar on Thursday, is likely to come under further selling pressure.

David Bloom, head of currency strategy at HSBC told CNBC the downgrade wasn't unexpected and was incorporated in the firm's bearish forecast for the sterling issued earlier in the week.

(Read More: Why the Pound Is Getting Pounded)

According to HSBC, the pound could fall to $1.48, while the euro could rise to 0.91 against the pound.

"The implications for GBP are negative, the more pronounced impact likely to be evident when Asian markets reopen on Monday," Bloom said.

In a note to clients, released on Thursday, Bloom said: "Compared to the period of stability seen over the previous three years the recent fall in GBP has been substantial but on a longer term historical basis this is still not the case.If we were to return to historical precedents, then a further significant leg down can not be ruled out."

Osborne said the downgrade was "a stark reminder of the debt problems facing our country" and added the government would continue to cut the deficit.

The U.K.government has come under criticism for its austerity plan with the International Monetary Fund (IMF) arguing that it should do more to boost growth.

The U.K.economy contracted 0.3 percent in the fourth quarter, raising fears of a triple-dip recession.

But so far, Osborne has stuck to his guns telling CNBC at the World Economic Forum (WEF) in Davos that it would be wrong to abandon austerity plans.

(Read More: Tolstoy a Better Read Than the UK Tax Code: Osborne)

Meanwhile, there are growing signs that some officials at the Bank of England (BoE) believe it should do more to boost growth by expanding its quantitative easing (QE) program.

Minutes released this week showed 3 out of the 9 members of the BoE's monetary policy committee, including Mervyn King, favored expanding QE.

That put further pressure on the pound, at a time when minutes from the Federal Reserve showed policymakers in the U.S. may be looking to curtail their QE program earlier than expected.

Follow Deepanshu Bagchee on twitter @DeepBagchee