Last week, positive progress in U.S.-China trade negotiations boosted global market sentiment, leading to a rally in stocks and risk assets. Meanwhile, gold, a traditional safe-haven asset, fell sharply by more than 5% before partially recovering over the weekend. The U.S. dollar remained relatively stable, as overall market sentiment shifted from cautious to optimistic.
As market confidence improved and trade tensions took a backseat, investors’ focus turned to the U.S. dollar. The dollar index held steady last week, hovering around the key 100-point level.
U.S. Credit Rating Downgraded
On Friday, Moody’s Investors Service announced it has downgraded the U.S. sovereign credit rating from the top-tier AAA to AA1. This is the first downgrade by Moody’s since 1919. The move reflects growing concerns about the United States’ rapidly rising debt, which now exceeds $36 trillion, and annual interest payments projected to surpass $1 trillion.
Moody’s pointed to the federal government’s ongoing challenges in implementing effective fiscal reforms as a key reason for the downgrade. This follows a similar downgrade by Fitch Ratings in 2023 and Standard & Poor’s in 2011.
Following the announcement, the US Dollar opened lower on Monday, signaling increased investor caution. The downgrade highlights concern about the U.S. fiscal outlook and could raise borrowing costs for the government. This may also lead to greater market volatility as investors reassess risk.
US Dollar Index Technical Outlook
From a technical perspective, the US Dollar showed signs of a potential reversal last week. However, mixed US economic data, the temporary truce in the US-China trade conflict, and uncertainty over monetary policy have kept the dollar’s movement limited.
Although the US Dollar recently formed a possible bullish reversal pattern, its upside remains limited below 101.80 and appears relatively weak.
However, the dollar index (DXY) has held firm above key support levels between 100.20 and 100.50, despite an early gap down at the market open. Maintaining this support zone keeps the potential reversal setup for the US Dollar intact.
US Dollar Outlook: Depends on Several Key Factors
However, the downgrade and ongoing uncertainties could weigh on the US Dollar, potentially causing some weakness. Yet, if these concerns do not lead to sustained selling pressure—as recent active sessions have shown limited downside—the Dollar may regain momentum.
The key focus now is on how price action develops in the coming days, along with upcoming economic data from the US and major economies like the UK and Eurozone. If the pound and euro weaken due to disappointing data or renewed concerns, the US Dollar could strengthen further, maintaining its near-term bullish setup.
Technical Outlook for Euro, Pound
EURUSD: Pressure Formed below 1.1400
The pair has broken below the key support zone between 1.1400 and 1.1280, suggesting potential for a deeper pullback.
Traders should closely monitor the 1.1100 level, which serves as a critical support. Continued weakness below 1.1280 would likely keep downside pressure intact, increasing the risk of a retest of 1.1100.
A clean break below this level could pave the way for further declines, especially if renewed US Dollar strength persists.
GBPUSD: Key Zone at 1.3400 – 1.3270
GBPUSD remains within a crucial consolidation range between 1.3400 and 1.3270, which poses a significant barrier to further bullish continuation.
Currently, the pair is holding above 1.3270, but the price action remains indecisive, suggesting a lack of clear directional momentum.
A confirmed break below 1.3270 could open the door for a deeper correction, with potential targets around 1.3150 and possibly extending to 1.3050 if downside momentum accelerates.