EUR/USD advances further on US credit downgrade, concerns over Trump’s tax bill
- EUR/USD rises further to near 1.1350 as the US Dollar remains under pressure due to Moody’s downgrade to the US credit rating.
- US President Trump fails to convince lawmakers to back tax-cut bill.
- The Euro gains as Trump confirms Russia-Ukraine truce talks.
EUR/USD jumps to near 1.1350 on Wednesday, extending its winning streak for the third trading day. The major currency pair strengthens as the US Dollar (USD) continues to face a sharp selling pressure amid the United States (US) credit rating erosion. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recoups some of its early losses, but is still 0.3% down to near 99.70.
Moody’s downgraded the US Sovereign Credit Rating to Aaa from Aa1 on Friday in the wake of fiscal imbalances and mounting interest rate obligations, a move that added concerns over the US Dollar’s credibility. The credit rating agency also showed solicitude over a likely increase in the current debt pile of $36 trillion, with US President Donald Trump aiming to pass a new tax bill of $3 trillion-$5 trillion.
Meanwhile, US President Trump failed to convince Republican lawmakers in a closed-door meeting on Capitol Hill on Tuesday to back the new tax bill through which he aims to fulfill his economic agenda. Republicans disagreed to support the tax-cut bill as they dissented the “increase in limits on deductions for state and local tax payments”, Republican Representative Mike Lawler said, Reuters reported.
On the economic front, investors await the preliminary S&P Global Purchasing Managers’ Index (PMI) data for May, which will be released on Thursday. The PMI data is expected to show that the overall business activity expanded at a steady pace. Investors will pay close attention to comments from employers in the private sector about whether they are opting for capacity expansion or are comfortable with costly imports due to the fallout of the tariff policy by the White House.
Federal Reserve (Fed) officials have indicated that the imposition of new economic policies by US President Trump is expected to de-anchor inflation, a scenario that discourages the central bank from bringing interest rates down. On Tuesday, St. Louis Fed Bank President Alberto Musalem said, “If inflation expectations become de-anchored, the Fed policy should prioritize price stability”. Musalem guided that the monetary policy is currently “well-positioned” as the economic policy uncertainty is “unusually high”.
Daily digest market movers: EUR/USD gains as Euro outperforms
- Sheer strength in the EUR/USD pair is also driven by the Euro’s (EUR) outperformance. The major currency performs strongly against all its major peers on Wednesday as investors become hopeful of a truce between Russia and Ukraine. US President Trump confirmed Russia-Ukraine ceasefire talks in the Vatican City through a post on Truth.Social. “Russia and Ukraine will immediately start negotiations toward a ceasefire,” Trump said.
- A ceasefire between Russia and Ukraine will be a favorable scenario for the Euro (EUR) as it will ease supply chain disruptions across Europe.
- On the monetary policy front, traders remain increasingly confident that the European Central Bank (ECB) will reduce interest rates in the June policy meeting. The reason behind firm ECB dovish bets is guidance from a slew of officials that inflation is on track to return to the central bank’s target of 2%.
- However, ECB Governing Council member Klaas Knot said on Tuesday that the medium-term inflation outlook is too uncertain to say whether the ECB needs to cut key rates again in June. "I can't exclude we will decide to have another rate cut in June, but I also can't confirm it," Knot said, according to Reuters.
- This week, the Spring Forecast report from the European Union’s (EU) executive arm also showed that inflation will return to the 2% target by the middle of the year. The report also showed that price pressures will average at 1.7% in 2026, a scenario that reflects downside risks to inflation.
- On the economic front, investors await the HCOB PMI data for the Eurozone and its major states, which will be released on Thursday. According to the preliminary estimates, the overall business activity is expected to have grown at a faster pace than what was seen in April.
Technical Analysis: EUR/USD climbs to near 1.1350
EUR/USD jumps to near 1.1350 on Wednesday, the highest level seen in two weeks. The near-term outlook of the pair is bullish as it holds the 20-day Exponential Moving Average (EMA), which is around 1.1240.
The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among traders.
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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