Moody’s Credit Downgrade Sends Shockwaves Across Currency Markets
The EURUSD pair surged to nearly 1.1250 in Tuesday’s European session, extending its rally from Monday. The latest bullish move in the common currency comes amid escalating concerns over the US Dollar’s weakening credibility, following Moody’s downgrade of the US Sovereign Credit Rating from Aaa to Aa1.
The downgrade has shaken investor confidence, pushing the US Dollar Index (DXY) down to the psychological support near 100.00. This significant blow to the Greenback underscores the market’s concern over Washington’s long-term fiscal health, especially as the US national debt hits $36 trillion.
Moody’s action reflects a deeper structural problem: the United States’ mounting fiscal imbalance and the lack of a credible long-term debt management plan. With former President Donald Trump’s “big beautiful bill” proposal poised to inject another $3–5 trillion into the economy, markets are alarmed about how such expansionary fiscal policies could further deteriorate the US’s debt position.
EURUSD Benefits from Dollar Weakness and EU Optimism
While the Dollar struggles to maintain footing, the Euro has shown surprising resilience. Despite growing concerns about disinflation in the Eurozone, the EURUSD pair continues to attract bullish interest, supported by a combination of US fiscal weakness and improving economic sentiment in the EU.
The European Commission’s Spring Forecast Report, released Monday, expects inflation to average 1.7% in 2026, with a return to the European Central Bank (ECB)’s 2% target likely by mid-2025. The report attributes potential downside risks to lower energy costs, the diversion of Chinese exports, and a stronger Euro.
These developments suggest that while the ECB may proceed cautiously with rate cuts, the outlook isn’t entirely bearish for the Euro. Indeed, ECB’s Isabel Schnabel, long seen as a policy hawk, acknowledged that “disinflation is on track,” although she cautioned that US tariff actions could reignite inflation in the medium term.
US-China Trade Tensions Add to Dollar Woes
Further complicating matters for the Greenback are renewed trade tensions with China. Beijing has voiced strong objections to Washington’s actions aimed at discouraging the use of Huawei-made AI chips, calling the move “discriminatory” and “market distorting.”
The Chinese Commerce Ministry accused the US of undermining the consensus reached in Geneva’s tariff negotiations, just days after the talks concluded. Washington’s rhetoric, labeling Chinese AI technologies as threats to national security, could signal another escalation in US-China tech and trade wars.
This development adds a fresh layer of uncertainty for Dollar bulls, especially as the Biden administration has already been under pressure to curb China’s access to advanced US technology while managing inflation and global supply chains.
ECB’s Cautious Optimism Amid Inflation Risks
The European Central Bank faces a delicate balancing act. While several ECB policymakers advocate for interest rate cuts, they remain cautious about external inflationary shocks, especially those stemming from US trade policies and geopolitical tensions.
Isabel Schnabel’s comments are particularly notable. As one of the ECB’s more influential hawks, her acknowledgment of disinflation progress lends credibility to the idea that monetary easing may be on the horizon—perhaps as early as the ECB’s June or July meeting.
However, with the Eurozone’s inflation forecast revised down, ECB officials remain split. Some fear that premature easing could hurt the Euro’s stability, while others argue that persistent low inflation necessitates a softer stance.
Markets Eye PMI Data for Next Directional Clues
Investors will closely watch the upcoming HCOB Flash PMIs for May, due Thursday. Expectations are for improvement in Eurozone business activity, particularly in the services sector, which has shown signs of revival in recent months.
April’s PMI readings pointed to a modest expansion, with Germany and France struggling to maintain momentum. If May’s figures surprise to the upside, they could further bolster the Euro by reducing the urgency for immediate ECB easing.
On the US front, market participants are equally focused on Wednesday’s FOMC Minutes, which may offer more clarity on how Federal Reserve policymakers view US debt dynamics and the inflation outlook—especially as consumer price growth remains stubbornly above 3%.
Technical Outlook: EURUSD Bulls Eye 1.1300
From a technical standpoint, EURUSD remains firmly bullish above 1.1200. The pair is approaching key resistance at 1.1250, and a sustained break above this level could open the door to a test of 1.1300 in the coming days.
Momentum indicators such as the Relative Strength Index (RSI) remain in positive territory, while the MACD continues to show bullish divergence. Support lies at 1.1170, followed by 1.1100, which has served as a strong base over the past few sessions.
What’s Next for the Greenback?
Unless US policymakers restore confidence in fiscal prudence, the Greenback could remain under pressure throughout Q2 and beyond. Market participants are already factoring in higher long-term borrowing costs for the US Treasury, which could reduce the attractiveness of US bonds and Dollar-denominated assets.
Additionally, with the Fed nearing the peak of its rate-hike cycle, further upside for the Dollar seems limited—especially if rate cuts materialize later in the year. In contrast, if the ECB delays its easing moves due to improving growth and inflation dynamics, EURUSD may continue to trend higher.
