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Overall, the strength of the EUR/USD uptrend remains intact. The erosion of confidence in the U.S. dollar outweighs the divergence in monetary policy between the Fed and the ECB.
Technical Outlook: On the daily EUR/USD chart, a bullish 1-2-3 reversal pattern is in play. Long positions initiated on the breakout of the internal bar near 1.1225 should be held.The transition from being respected to facing ridicule can happen in an instant. This is evident in the shift from "Buy America" to "Sell American," a change prompted by Moody's downgrade of the U.S. credit rating. The downgrade, which was attributed to a growing budget deficit, has sparked renewed interest among investors in de-dollarization.
The blow to the greenback came from multiple directions. Moody's verdict pushed both nominal and real yields on U.S. Treasuries higher—a troubling development for an economy already showing signs of slowing down. It's also bad news for the bottom line of American corporations: costs are rising, profits are shrinking. All of this will likely result in a decline of the S&P 500. And when the index falls, the U.S. dollar—already seen by many as a risky currency—will likely follow.
At the same time, Moody's decision raised doubts about Congress's willingness to renew the tax-cut stimulus packages that Donald Trump is banking on.
According to Bank of America, fiscal uncertainty, a slowing economy, and unclear White House policy are now key drivers of the USD index's downward trend. Other contributing factors include portfolio diversification away from U.S. assets, a worsening capital account, and the U.S. president's intent to weaken the dollar.
In contrast, Europe appears to be gaining favor, moving from fiscal restraint toward spending. According to a Bloomberg leak, all 27 EU member states have approved a €150 billion defense fund. The spending could act as a powerful stimulus for the eurozone economy.
Even though the European Commission expects inflation in the euro area to fall to 2% in 2025 and 1.7% thereafter—due to an influx of Chinese goods, a stronger euro, and lower energy costs—this hasn't scared off EUR/USD bulls. As European Central Bank President Christine Lagarde aptly noted, while the dollar once strengthened in times of political uncertainty, it now weakens due to a collapse in trust—all the better for the euro.
Without a doubt, Moody's downgrade soured the mood in Washington. Treasury Secretary Scott Bessent called the rating agency "perpetually late" and claimed that the current administration couldn't have done all the damage in just 100 days. He pinned the blame on the former president and his team. But the bigger question is: what will Washington do to prevent the stock market from tanking because of the downgrade?
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