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Many traders were caught by surprise last night after Fitch warned that it might downgrade UK from AAA status. Selling panic took the pound down 150 pips within an hour after the remarks, but it then climbed back up to its original price the next day. Let us examine the reasons why the pound is so well supported.

The Fitch ratings are a measure of credit quality and investors and traders watch them closely. So when it announces in an interview that the UK is at the top of the list of countries susceptible to have their rating downgraded, fear kicks in quickly.

However, the down move was short lived, and it seems that many found a buying opportunity instead of a reason to fear a breakdown.

We believe that the pound’s support is due to two things: the US dollar weakness and the encouraging signs that the UK’s economy might finally start to recover.

No one believes that the US dollar will recover anytime soon. Its weakness is pushing up every other currency and the pound is no exception.

As for the UK’s economy, we could very difficultly imagine the UK’s economy to get much worse. Most think that it has reached a bottom. Even the BOE decided to increase its quantitative easing program by only £25 Billion, half of what was expected. Moreover, housing data is stabilizing, same thing for retail sales.

The pound should not end the year much higher, but as soon as signs of recovery will start to appear, we can be sure that it’ll climb up very fast. At least, by the look of things, this is what many think if the idea of a Fitch downgrade couldn’t breakdown the support.

But remember that the opposite can be true. If the GDP doesn't go up, then the GBP will tank. If the much feared double dip economy occurs, then again the GBP will tank. The UK's economy looks to be the last one to recover and for that, it appears to be very fragile.