Written by the Market Insights Team
Credit concerns hit US dollar
George Vessey – Lead FX & Macro Strategist
The US dollar stabilized last week, supported by trade deal progress and lower tariff rates, which eased concerns over US economic disruption. However, sentiment turned sharply negative after Moody’s downgraded the US credit rating, citing mounting debt concerns and cutting the country’s score from Aaa to Aa1.
Last week’s risk-on tone from US-China tariff de-escalation had lifted the dollar index for a fourth consecutive week, gaining 3% from three-year lows. Yet, structural challenges remain, and with Trump considering a return to country-specific tariffs, policy uncertainty clouds the outlook. The Moody’s downgrade highlights long-term risks, including debt sustainability, which could further erode the dollar’s haven appeal. Markets are reacting swiftly – equity futures dropped over 1%, and long-dated Treasury yields approached 5%, reflecting growing Wall Street worries over the US bond market.
Meanwhile, US economic data sent mixed signals last week. Inflation remained soft, as service-sector spending weakened, though tariff-driven price increases were evident in goods. Retail sales disappointed, suggesting consumers remain sensitive to price hikes, while industrial production suffered from tariff impacts, though bottlenecks may ease amid the trade truce. This week, the focus is on jobless claims and flash PMIs, but the overriding theme will be market reaction to the credit downgrade, as debt concerns now drive volatility across US markets.
Euro upside hinges on dollar weakness
George Vessey – Lead FX & Macro Strategist
The FX landscape continues to shift. With the USD’s downward trend stalling as tariff easing bolstered sentiment, EUR/USD dipped to $1.12, while risk-on conditions weighed on safe-haven currencies like JPY and CHF. However, with the “sell America” trade back in focus after Moody’s US credit downgrade, the euro might stand to benefit alongside other liquid haven peers.
The euro led gains among majors post-“Liberation Day”, finding a new equilibrium as economic data holds firm. German fiscal offsets have supported manufacturing, while expectations for a deeper ECB cutting cycle may fuel economic activity at the margins. That said, further upside hinges on USD weakness, as price action is increasingly disconnected from fundamentals. Without negative dollar developments, sustained euro gains remain uncertain. We need to see EUR/USD reclaim the 21-day moving average, currently located at $1.1294, to boost our conviction of a sustained uptrend. The 50-day moving average at $1.1115 is a major to support level to keep an eye on.
Looking ahead, Thursday’s Flash PMIs will be key. Markets anticipate a rebound in services, following last month’s unexpected decline, which could set the tone for the euro’s next move.
UK-EU summit could shape pound’s path
George Vessey – Lead FX & Macro Strategist
The British pound remains supported by a string of positive data surprises, but focus now shifts to the first UK-EU summit since Brexit, where the government aims to reset trade relations with its largest partner. GBP/USD has reclaimed the $1.33 handle, aided by dollar weakness, while GBP/EUR dipped below €1.19 amid souring risk sentiment.
We’ve already seen stronger than expected UK GDP growth in Q1, but its strength may prove temporary as March’s expansion was driven by investment and net exports, while private and public consumption stayed weak. Meanwhile, labour market data signals loosening conditions, with unemployment rising to 4.5%, vacancies falling to 761,000, and wage growth plateauing at 5.6% y/y. These trends suggest inflationary pressures may ease, reinforcing expectations for a 25bp rate cut at the Bank of England’s June meeting. However, April CPI inflation is expected to accelerate, with headline CPI forecast at 3.3% y/y, core inflation at 3.6% y/y, and service CPI at 4.9% y/y. Investors will also watch preliminary PMI data, which will provide insight into Trump’s trade policies’ impact on the UK economy.
The UK-EU trade negotiations could be the most influential factor for the pound, with a positive outcome potentially driving further GBP gains. While a new defence pact is expected, fishing rights and youth mobility remain contentious. Officials anticipate three key outcomes: a security pact, a declaration on global issues, and a framework for future negotiations.
GBP/USD up over 1% in a week
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Calendar: May 19-23
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.