EUR/USD (1.4205) The decision by Moody’s to put US on negative watch came at one of the most illiquid times of the currency trading day yesterday and so had striking effect. The dollar declined as the credit rating agency highlighted the risks that would emerge from a failure of US lawmakers to reach a decision on the debt ceiling. Investors are being forced to face a situation that they were previously convinced they would never have to face, namely that no law is passed by the August 2nd deadline. Markets had expected extended wrangling; they predicted that hard negotiations would be conducted right up to the eleventh hour. But now is the eleventh hour and Congress seems no closer to an agreement than at the outset. Indeed, the Republican House leader sees more tragedy in increased government spending than in a default. This is obviously not the preference of bondholders. Employing the threat of a technical default as a political tool is clearly a concern for Moody’s.
The euro has already regained its stability. From a broad perspective, while it holds above 1.3910, we can believe that a base is in place for an ultimate uptrend resumption. Nearer-term, the level 1.4035 was where a great deal of volume was turned over yesterday. Traders who were wrong-footed by Moody’s may well have positions stranded there. Hence we expect the euro to be solidly supported ahead of the weekend.
Market Bias Index
The EUR probably has not the best standpoint to view the impact of the Moody’s decision on the dollar – the rate has merely returned to fair-value. The USD/CHF bias, in contrast, has moved to its widest of the year.
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Deutsche Bank
Fixed Income Research – Global