EUR/USD surges as US credit downgrade batters US Dollar.

EUR/USD gains sharply to near 1.1290 as the US Dollar has been battered sharply after Moody’s Rating downgraded US Sovereign Credit to Aa1.
Traders expect that the Fed is unlikely to cut interest rates in the next two policy meetings.
Investors await the announcement of a potential EU-UK trade deal.

EUR/USD trades 0.85% higher to near 1.1290 during North American trading hours on Monday. The major currency pair strengthens as the US Dollar (USD) underperforms its peers due to erosion in the United States (US) Sovereign Credit Rating. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides to near 100.20.

On Friday, Moody’s downgraded the long-term issuer and senior unsecured ratings of the US to Aa1 from Aaa. The one-notch downgrade in US Sovereign rating came on the back of mounting fiscal issues, which market experts believe the administration is unable to address in the near term.

US credit erosion has resulted in a sharp increase in Treasury yields, with investors discounting the risk premium. The 10-year US Treasury yields are up 2.3% to near 4.54%, at the time of writing. Additionally, financial market participants are worried that the so-called ‘big beautiful bill’ by the White House will further boost US bond yields.

Meanwhile, increasing optimism on a potential trade deal between the US and China is expected to support the US Dollar. Over the weekend, US President Donald Trump affirmed positively in an interview with Fox News after he was asked whether he would visit China for direct trade talks with President Xi Jinping.

During European trading hours, White House’s economic advisor, Kevin Hassett also expressed confidence about closing more trade deals this week, but didn’t mention any trading partner. “I would not be surprised if there are more trade deals this week,” Hassett said.

On the monetary policy front, traders are increasingly confident that the Federal Reserve (Fed) will not reduce interest rates in the next two policy meetings due to elevated consumer inflation expectations in the wake of import duties imposed by US President Trump. Meanwhile, Fed officials are also more inclined to bring consumer inflation expectations down than to act prematurely by reducing interest rates to provide interim support to potential economic shockwaves. “Right now, we [The Fed] see more risk of higher inflation than the employment side of the mandate,” Atlanta Fed Bank President Raphael Bostic said in an interview with CNBC during North American trading hours.