Pound sterling (GBP) is under pressure in the foreign exchange market as traders ditch the currency following Friday’s downgrade of the UK by credit rating agency Moody’s.

Leveraged short sterling ETFs have surgeed as the pound has weakened against the dollar and euro following Moody’s downgrade of the UK credit rating.

The currency is likely to face continued pressure in the coming weeks unless confidence improves in the UK’s recovery effort.

Data from the US Commodity Futures Trading Commission, showing that speculators continue to short sell the currency against the dollar (USD) in the hope they can make money from further falls, appear to suggest that sterling will indeed face ongoing pressure in the coming days and weeks.

Ms Kathy Lien, Managing Director of FX Strategy at BK Asset Management, said: “Moody’s decision to downgrade the UK’s sovereign debt rating only added to the growing numbers of reasons for why the GBP should remain under pressure…Fundamentally, we believe that the GBP/USD could fall at least another 2% to 3%. Technically, the GBP/USD has broken its 2 ½ year range low. The psychologically significant $1.50 level could serve as near term support but the March 2010 and May 2009 low of $1.4755-85 appear to be a more important level.”

A recent survey by Barclays Stockbrokers, the UK’s largest execution-only retail broker, suggested that sterling could also fall against the euro (EUR). The survey revealed that approximately half of traders using Barclays’ broking service expect further falls in GBP/EUR over the next three months, compared to only one quarter who anticipate a rebound

Paul Inkster, Head of Product at Barclays Stockbrokers, said: “Following the loss of Britain’s AAA credit rating, the pound fell to a 16-month low against the euro. Furthermore the possibility of more quantitative easing is affecting the currency, and the easing of market tensions in the Eurozone has impacted the perception of sterling as a safe haven.”

Sterling (GBP) versus US dollar (USD) and euro (EUR), year to date.

However, the outlook for sterling is not entirely gloomy – at least not in the longer term.

Petr Krpata, an FX strategist at Barclays, said: “While we think that GBP softness against USD is likely to continue throughout the year, we see scope for the currency to recover some of its recent losses against EUR later in the year. Our economists’ view is that the UK economy is likely to recover later in the year, partly helped by sterling’s recent slide, and grow faster than the euro area.”

He added: “Overall, the downgrade is definitely not positive for GBP against the major currencies, but rather than being a key driver of GBP, it will be just one of several drivers. We continue to expect the unfavourable UK monetary stance to keep GBP soft for the time being.”

While all this generally spells bad news for UK holiday makers and importers, further weakness in the near term represents a potential opportunity for currency traders. An effective way to capitalise on this opportunity is via leveraged exchange-traded products (ETPs), which provide geared short exposure to sterling versus other currencies.

For investors looking to short sterling versus the dollar, the ETFS 3x Long USD Short GBP ETC (USP3) fits the bill. Similarly, investors seeking to short sterling versus the euro could look to the ETFS 3x Long EUR Short GBP ETC (EUP3). Both products are issued by ETF Securities and listed on the London Stock Exchange (LSE).

The exchange-traded certificates (also known as exchange-traded currencies, ETCs) are linked to triple-leveraged currency indices developed by Morgan Stanley. Each index reflects the performance of a fully collateralised leveraged position in currency forward contracts, which are rolled on a daily basis. The indices provide exposure to movements in exchange rates between currencies and local interest rates, and a daily collateral yield.

In the case of the ETFS 3x Long USD Short GBP, the security is linked to the performance of the MSFX Triple Long US Dollar/GBP Index (Total Return). This index provides three times long the daily percentage change to (i) movements in exchange rates between the local currency USD and GBP and (ii) local interest rates based on those implied in forward contract prices, plus a collateral yield. So far this year, the ETC is up 20% compared to a 6.3% fall in GBP/USD (as of 22 February 2012).

In a similar vein, the ETFS 3x Long EUR Short GBP ETC (EUP3) is linked to the performance of the MSFX Triple Long Euro /GBP Index (Total Return). Year to date this product is up 19% compared to a 6% fall in GBP/EUR (as of 22 February 2012).

Both products have an annual management expense ratio of 0.98%.

Investors reluctant to take on leverage also have plenty of options at their disposal. As well as its geared range, ETF Securities offers a suite of unleveraged currency ETCs, as do Source (managed by Pimco) and db X-trackers. For euro exposure, options include the Pimco Euro Short Maturity Source ETF (PJS1) and db X-trackers EONIA UCITS ETF (XEOD); while for US dollar exposure, options include the Pimco US Dollar Short Maturity Source ETF (MINT) and db X-trackers US Dollar Cash UCITS ETF (XUSD).