25.05.202310:03 Forex Analysis & Reviews: US sovereign credit rating at AAA in question

The euro and pound sterling continued to fall against the US dollar in sync with the US stock market. House Speaker Kevin McCarthy expressed optimism that White House and GOP negotiators could reach an agreement in time to avert a potentially catastrophic default. However, his statement did not soothe traders as the risk of a US credit rating revision came to the fore.

After another four-hour meeting with President Joe Biden, McCarthy said a deal could be settled before June 1, the date Treasury Secretary Janet Yellen would announce that the US had run out of money. "I still think we have time to come to terms and get it done," McCarthy said after the meeting concluded.

But then, a few hours later, Fitch Ratings placed the US 'AAA' credit rating under special scrutiny. This led to even greater, mounting concern about the country's ability to prevent the first ever default. This happened for the first time during similar upheavals in 2011. However, Fitch said it still expects the issue of the debt limit to be resolved by June 1.

Against this background, all risky assets failed. The bond market also faced a challenge as it was hit by sell-offs of US Treasuries which continued today in Asian trading. Yields on 2- and 10-year Treasury bonds rose to the levels not seen since mid-March this year, at the peak of the banking crisis. Rates on Treasury bills maturing June 1 on Wednesday exceeded 7%, which is comparable to the yield on junk bonds.

Treasury Department spokeswoman Lily Adams also spoke yesterday, saying the warnings highlight the need for swift bipartisan action by Congress to raise the national debt limit and prevent a man-made crisis in the economy. In the late afternoon, Treasury Secretary Janet Yellen also noted that the Biden administration was focused on the deal to limit the debt, rather than planning for a default. "We are committed to not missing payments and are committed to raising the debt ceiling," Yellen said Wednesday during a video conference at a Wall Street Journal event in London.

On Capitol Hill, some Democratic members of the House of Representatives also accused the Republicans of jeopardizing the US credit rating. House Republicans have also stepped up their accusations that Biden lacks urgency in the talks, while a Democratic aide named McCarthy is unwilling to compromise on a wide range of burning issues, threatening the deal's legislative prospects.

As I noted earlier, House legislators are expected to leave their jobs on Thursday night ahead the Memorial Day holiday weekend. If a default does occur, economists predict it could lead to a recession in the US, with massive job losses and higher consumer credit costs.

As for the technical picture of EUR/USD, the bear market is still going on. To enter the market, the bulls have to protect 1.0715 and seize 1.0760. Then, the door will be open towards 1.0790. Once this level is regained, the bulls will be able to push the price up to 1.0840, albeit it would be complicated without solid fundamental background. In case EUR/USD declines, I expect the activity of large buyers at about 1.0715. If the buyers don't assert themselves, it would be a good idea to wait until the low of 1.0670 is updated or open long positions from 1.0630.

When it comes to GBP/USD, the pound sterling remains under selling pressure. We could predict that the instrument will grow only after the bulls take control over 1.2360. A breakout of this level will cement the hope for a further recovery to 1.2410. Afterwards, we could expect a robust climb to 1.2460. In case GBP/USD falls, the bears will try to take control over 1.2320. If successful, a breakout of this level will deal a blow to the bulls and push GBP/USD down to the low of 1.2275. A lower target is seen at 1.2230.