Written by the Market Insights Team
The ‘Sell America’ undercurrent
Antonio Ruggiero – FX & Macro Strategist
Post-Moody’s downgrade of US debt from AAA to AA1 late Friday, long-term Treasury yields surged toward the psychological 5% mark — a clear sign that investors are baking in a higher risk premium on US government debt (Figure 1). The US dollar fell across the board despite rising long-term Treasury yields, reinforcing long-term worries about US fiscal stability and confidence in US assets.
But unlike the 2011 S&P downgrade during the “fiscal cliff” saga — when inflation was low and Treasuries were the world’s ultimate safe haven — today’s backdrop couldn’t be more different. Inflation is stickier, policy erratic, and even US equities are flashing red on valuation metrics.
In fact, for the first time in nearly 25 years, the earnings yield on equities is now below the 10-year Treasury yield (Figure 2). Investors are accepting lower compensation for riskier assets — a reversal of the usual order of things — suggesting US stocks are overbought and underpaying relative to bonds.
But bonds don’t offer much comfort either. Yields have risen mostly due to the term premium (Figure 3): the extra return investors demand to hold longer-term debt amid heightened uncertainty. That’s not a bullish signal. It means bonds aren’t exactly a safe bet right now either.
Essentially, stocks look overvalued, bonds look risky, and the dollar index has felt the pressure — falling almost 1% since the downgrade, with the USD weakening versus most major currencies.
All of this points to a broader takeaway: risk appetite for US assets is deteriorating. That’s the crux of the now-ubiquitous “Sell America” narrative. And while dollar strength may linger in the short run thanks to rate differentials, the medium-term direction looks softer.
Looking ahead, Moody’s downgrade may dominate market chatter this week. US economic data — jobless claims, PMIs — are unlikely to shift sentiment much. Still, if trade negotiations continue on a positive path and openness to trade endures, strong prints could quietly lay the groundwork for a dollar rebound further down the line.
Euro firms as confidence grows
George Vessey – Lead FX & Macro Strategist
The euro climbed toward $1.13 on Monday, extending its recovery from 1-month lows last week, fuelled by broad USD weakness following Moody’s downgrade of US credit. ECB President Christine Lagarde reinforced market sentiment, signalling that the central bank will not resist a stronger euro.
Rather than framing appreciation as a threat, she called it an “opportunity,” linking it to global capital shifts and diminishing confidence in US policy. Markets are responding, with long-dated euro call options gaining traction as one-year risk reversals rise above one-month levels – a sign that this rally is structural, not just a temporary bounce. Technically, EUR/USD still needs to clear the 21-day moving average to solidify the uptrend, but its first close above the 55-month moving average since 2021 suggests growing market conviction. The missing catalyst for a push toward $1.20 may not be short-term headlines, but rather steady reserve rebalancing, policy stability, and the ECB’s strengthening credibility.
On the data front today, all eyes are on Eurozone consumer confidence, which is expected to rise for the first time in three readings, providing another boost to sentiment.
Pound rises but political breakthrough is no game-changer
George Vessey – Lead FX & Macro Strategist
The British pound surged toward $1.34, nearing its seven-month peak, as investors welcomed a partial reset in UK-EU economic relations. Optimism surrounding key UK economic data and a major political breakthrough has fuelled sterling’s gains alongside broad-based dollar weakness. GBP/EUR remains largely unchanged just beneath the €1.19 handle, but still up 1% on the month and above long-term average rates.
Nine years after Brexit, the UK’s Labour government secured a veterinary agreement, aligning agricultural and food standards with the EU. This eliminates border checks and paperwork, easing trade friction. In exchange, European fishing boats gain UK access for 12 years, and discussions on youth migration – a key EU demand- are now on the table. Both sides also agreed on closer defence cooperation, marking a shift toward stronger diplomatic ties.
However, the deal won’t significantly boost the UK economy or prevent tax hikes in the autumn. Deeper regulatory alignment could support sterling, but entrenched UK-EU red lines make further integration politically challenging. The UK government has ruled out single market access or a customs union too, reinforcing long-term trade barriers.
While sterling benefits from renewed optimism, the economic impact remains uncertain, and political hurdles could limit further gains. Investors will watch for additional policy shifts that could shape the pound’s trajectory in the months ahead as well as inflation data due early tomorrow morning which will likely impact Bank of England policy.
Japanese yen is leading the pack
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 19-23
All times are in BST
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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.
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