Forex Flash: GBP/USD reaction to Fitch action should be quite modest - TD Securities

FXstreet.com (Córdoba) - Fitch announced Friday that it has downgraded the UK's credit rating from AAA to AA+, with a stable outlook. Moody's had already downgraded the UK in February, leaving S&P as the only major agency that maintains UK at AAA.

Commenting on the matter, the TD Securities team notes that the driving factor behind Fitch's downgrade was the UK economy's weak economic outlook, which has led to upward revisions to forecasts for UK budget deficits and government debt. "This upcoming week's economic data will only support that idea, as we expect to see a small contraction for Q1 GDP (market +0.1% Q/Q), which would put the UK in an unfortunate 'triple-dip' recession scenario", says TD.

"Given that we've already been through this once before, we don't expect to see any unusual price action in gilt markets on Monday morning", analysts add. "GBP is probably more vulnerable to some near-term weakness, but FX markets will likely turn their attention toward this week's economic data (which may also be GBP-negative) and then prospects for further QE at the BoE's May meeting (which should be GBP-positive, as we do not expect further QE). But all in all market reaction should be quite modest".