Late yesterday afternoon Fitch Ratings warned the UK of a potential loss in its currently pristine credit rating.  The release helped to push the pound sterling lower through 1.5700 against the US dollar – hitting an overnight low of 1.5663.  Although warranted – given the recent spate of disappointing economic data out of the UK – the warnings aren’t expected to damage the pound sterling that much further.

For one, the releases are just a reiteration of previous warnings published by Moody’s Investors Services in the tailend of last month.  This means that most of the risk associated with a potential downgrade has already been priced into the exchange rate.  The notion can be confirmed by taking a look at the price action over the last two weeks.  Since the Moody’s announcement, sterling losses have mounted – to a total depreciation of 2.3% against the greenback.  Given the recent depreciative move, it’s no wonder the currency hasn’t really suffered in the last 24 hours – lending to less of a likelihood of additional losses in the short term.

Additionally, Fitch’s warning comes with several conditions – which lightens the severity of the announcement.  Although noting that the UK economy remains in a low growth environment and exposed to European fiscal problems, analysts at the global credit agency see upcoming budget plans by Chancellor of the Exchequer Osbourne as “credible” and likely to “reaffirm the government’s commitment to deficit reduction.”  This along with the pound’s international status as a “reserve currency” will help to underpin the current top rating on the economy.

If anything, the recent announcements will simply reaffirm the Bank of England’s commitment to price stability and supporting economic growth – further justifying the recent increase in the bank’s asset purchase plan.  At the beginning of last month, policymakers extended the current facility by 50 billion pounds.  Any further stimulus on top of that is likely to be dependent on upcoming results in the coming months.

The sentiment will likely keep the pound afloat for now against the greenback with support just below at 1.5650.

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