May 19, 2025

“The markets are digesting a surprise downgrade to the US credit rating by Moody’s, with investors taking the excuse to weaken the dollar this morning. It is PMI week, with data from the US, UK, and eurozone all landing on Thursday.”

Tim Hallinan – Trading Director

USD

The big news over the weekend was Moody’s downgrade to the US sovereign credit rating from AAA to Aa1, citing large sustained deficits and a ballooning interest bill. Treasury yields have inched higher and the dollar is trading a touch weaker across the board this morning, but the market impact is likely to be contained. It is a shock, but not a surprise. It is a catch-up to similar moves from S&P in 2011 and Fitch in 2023 and, in Bessent’s words, it is known as a ‘lagging indicator’. The US has been running a deficit at 7% of GDP and the national debt has reached $36bn – something Trump’s ‘Big, Beautiful Bill’ is only set to worsen. The deteriorating fiscal situation has been a long-running concern among investors and, while the markets have gained little new information from this decision, it is a nervy time for markets and they have responded by selling the dollar. Today brings the leading index and some speeches from the likes of Bostic, Jefferson, and Williams at the Fed, though the focus will be on Thursday’s PMIs and the latest indications on growth.

GBP

The focus for sterling this week is on a summit with the EU and an inflation print on Wednesday. News has broken this morning of a ‘breakthrough’ in talks with the EU over the weekend, with deals reached on fisheries, agriculture, youth mobility, and other areas of concern. The prospect of closer ties with the EU is typically a positive for the pound, though there has not been any obvious benefit for GBP/EUR so far this morning. It is a different story for GBP/USD, which has pushed above the 1.33 barrier. Wednesday’s CPI print is expected to jump from 2.6% to 3.3%, thanks to a recurring pattern now where regulated prices (energy, water etc) take a big uplift at the beginning of the fiscal year.

EUR

The euro continues to take few cues from Europe itself and remains within the dollar’s grip. The Moody’s downgrade has lifted the single currency around 0.7% this morning. Thursday’s PMIs and Friday’s negotiated wages figures are the central focus this week, with markets pricing in two cuts and a policy rate of 1.75% by the end of the year. The UK-EU summit might be a marginal positive if there is progress on economic integration, though of course it is sterling that stands to benefit more.

Markets

The equity markets have responded negatively to the US’ downgrade. European indexes have opened broadly lower by about 0.5% this morning, and US stock futures are down more than 1%.

Main Economic Events (All Times CET)

4:00am: Chinese Retail Sales
4:00pm: US Leading Index

To learn more about Ballinger Group, please visit our website or our LinkedIn page.