EUR/USD: Moody's (slightly) penalises the dollar

Buying and selling forces continued to balance out in the EUR/USD in the very short term, in a foreign exchange market that is questioning the far-reaching consequences of the trade war, even though concrete progress has been noted between Washington and, respectively, Beijing and London. The euro, however, regained a few pips, without gaining the upper hand, following the announcement by Moody's of a downgrade of the United States' sovereign rating.

"After a bit of euphoria following the announcement of the reduction in tariffs between the United States and China, from prohibitive levels, and the 90-day pause to continue negotiations, it seems that 'fatigue' is winning over risk-taking," says Xavier Chapard of LBPAM. "This seems reasonable given the major uncertainties that have yet to dissipate in order to understand the future imposed on us by the United States. The fact that the worst may have been avoided does not mean that we are returning to the world of yesterday," he adds.

"Donald Trump will not reverse the very principle of tariffs, and it therefore seems difficult for us to adopt a more optimistic stance than the one already priced in by the markets. Above all, the concrete effects of the trade war on corporate results do not yet seem to be fully at the center of attention," insists Thomas Giudici, head of fixed income management at Auris Gestion.

The rating agency Moody's has therefore downgraded its US debt rating from Aaa to Aa1, adding a stable outlook. It justifies this downgrade by the rise in US debt and its cost to the federal budget. It was the last of the three major agencies to make this decision. Fitch downgraded it one notch to AA+ in 2023, while S&P was the first rating agency to strip the United States of its precious triple-A rating in 2011.

"According to preliminary estimates, which are not final, the United States could see its primary deficit increase by as much as $5.8 trillion over the next ten years. This equates to a doubling of the debt growth rate compared to current legislative projections. All other things being equal, the federal debt could reach $59 trillion, or 134% of GDP in 2034 and 211% in 2055, compared to 117% and 156% respectively according to previous estimates from the Congressional Budget Office," explains Chris Dembik, investment strategy advisor at Pictet AM, this Monday morning.

10-year Treasuries, the yield on 10-year government bonds, edged up slightly to 4.53. The 30-year yield climbed above 5%.

The week ahead will be busy on the statistical front, with the key dates being flash PMI barometer data for the current month, on both sides of the Atlantic on Thursday. In the immediate future, consumer prices, excluding food, energy, alcohol, and tobacco, are confirmed to have risen by an annualized 2.6% for the month of April.

Right now, the EUR/USD is trading at $1.1264.

KEY CHART ELEMENTS
The euro/dollar is currently undergoing a major chart test: that of the 50-day moving average (in orange), the last time support was found was during the pullback on 28 February. A break in this trendline would release additional selling energy. In the immediate future, indecision is graphically reflected by a series of doji stars.

MEDIUM-TERM FORECAST
In light of the key chart factors we have mentioned, our medium-term view on the EUR/USD exchange rate is neutral.

We will maintain this neutral view as long as the EUR/USD exchange rate is positioned between the support at $1.1202 and the resistance at $1.1460.