EUR/USD soars as Greenback suffers from US Sovereign credit downgrade
- EUR/USD gains sharply to near 1.1270 as the US Dollar has been battered sharply after Moody’s Rating downgraded US Sovereign Credit to Aa1.
- Traders expect that the Fed is unlikely to cut interest rates in the next two policy meetings.
- Investors await the announcement of a potential EU-UK trade deal.
EUR/USD surges to near 1.1270 during European trading hours on Monday. The major currency pair strengthens as the US Dollar (USD) slumps due to erosion in the United States (US) Sovereign Credit Rating. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides to near 100.20.
On Friday, Moody’s downgraded the long-term issuer and senior unsecured ratings of the US to Aa1 from Aaa. The one-notch downgrade in US Sovereign rating came on the back of mounting fiscal issues, which market experts believe the administration is unable to address in the near term.
US credit erosion has resulted in a sharp increase in Treasury yields, with investors discounting the risk premium. The 10-year US Treasury yields are up 2.3% to near 4.54%, at the time of writing. Additionally, financial market participants are worried that the so-called ‘big beautiful bill’ by the White House will further boost US bond yields.
Meanwhile, increasing optimism on a potential trade deal between the US and China is expected to support the US Dollar. Over the weekend, US President Donald Trump affirmed positively in an interview with Fox News after he was asked whether he will visit China for direct trade talks with President Xi Jinping.
On the monetary policy front, traders are increasingly confident that the Federal Reserve (Fed) will not reduce interest rates in the next two policy meetings due to elevated consumer inflation expectations in the wake of import duties imposed by US President Trump.
Daily digest market movers: EUR/USD gains ahead of potential EU-UK trade deal
- Sheer strength in the EUR/USD pair is also driven by the Euro’s (EUR) outperformance against its major peers at the start of the week. The major currency pair gains ahead of the announcement of a potential trade deal between the European Union (EU) and the United Kingdom (UK) later in the day, the first since the announcement of Brexit.
- The EU and the UK are expected to announce a trade pact across various industries, such as defense, agriculture, and energy. Strengthening economic ties between Europe’s neighbouring economies at a time when the Eurozone inflation has come down significantly, the European Central Bank (ECB) has lowered its interest rates substantially, and the German economy is on a path of fiscal reforms, which is favorable for the continent’s growth outlook.
- Additionally, the ECB is expected to reduce its interest rates further due to growing concerns over Eurozone growth and inflation. ECB policymaker and governor of the Belgian central bank, Pierre Wunsch, stated in an interview with the Financial Times (FT) over the weekend that interest rates would go slightly below 2% amid downside risks to inflation and growth. Wunsch warned that tariffs imposed by US President Trump have pushed “risks to inflation on the downside”. He ruled out the possibility of a “larger-than-usual interest rate cut” in the foreseeable future.
- The next major trigger for the Euro will be trade talks between Washington and Brussels. Meanwhile, EU trade commissioner Maroš Šefčovič stated in an interview with the FT over the weekend that the continent intends to buy US gas, weapons and agricultural products to cut the US-EU trade deficit. Šefčovič signaled that he would meet US trade representative Jamieson Greer next month at an OECD ministerial meeting in Paris.
- Analysts at Capital Economics suspect that the trade deal between the EU and the US is imminent as Washington has not shown urgency in resolving trade disputes with the continent the way it has with China, Japan, and India. Another reason behind slower progress in US-EU trade talks is the difficulty for the continent in achieving consensus among the 27 member states.
Technical Analysis: EUR/USD jumps to near 1.1270
EUR/USD rallies to near 1.1270 at the start of the week. The near-term outlook of the pair has turned bullish as it manages to hold the 20-day Exponential Moving Average (EMA), which is around 1.1214.
The 14-period Relative Strength Index (RSI) recovers strongly above 50.00 after sliding to near 40.00, suggesting increasing bullish momentum.
Looking up, the April 28 high of 1.1425 will be the major resistance for the pair. Conversely, the psychological level of 1.1000 will be a key support for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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