• EUR/USD forecast boosted as Moody’s downgrade rekindles the ‘Sell America’ theme
• Dollar under pressure despite rising yields
• EUR/USD attempts breakout from bullish continuation pattern

It seems like the “Sell America” narrative is making a comeback, this time thanks to a credit rating cut by Moody’s. The agency’s decision to downgrade the US sovereign rating late in the day on Friday has nudged 30-year Treasury yields above the psychologically important 5% threshold—sending tremors through some global markets. Wall Street futures have dropped as investors worldwide are now questioning Washington’s fiscal footing. In the wake of the downgrade, we also saw traditional safe havens such as gold and the yen gained ground. Unsurprisingly, the dollar sold off broadly, giving the bullish EUR/USD forecast a fresh boost.

What’s moving markets now?

To put it simply, Moody’s has reawakened anxieties over America’s fiscal discipline. Late Friday, the agency lowered its US rating from Aaa to Aa1—the last of the major three to do so. Markets reacted swiftly, with futures sinking and haven assets rallying. Moody’s cited persistent failure across party lines to tackle the expanding deficit and ballooning debt. Quite right too—some might ask what took them so long.

The market response was textbook. Yields on long-dated Treasuries jumped, with the 30-year piercing above 5%—a level not visited since October 2023. Both the S&P 500 and Nasdaq futures dipped, while the dollar weakened despite those climbing yields. The greenback shed around 0.7% against a basket of peers, with the EUR/USD one of the standout performers, gaining roughly 1%. Even commodity-linked currencies managed to edge higher, in spite of the risk-off signals from equities.

So why did the EUR/USD rise despite higher US yields?

In essence, mounting concerns over the sustainability of US debt now appear to be outweighing yield differentials. Investors are increasingly jittery about the cost implications of higher borrowing, especially given the backdrop of Donald Trump’s ongoing trade disputes and proposals for unfunded tax cuts. Not exactly confidence-inspiring.

Moody’s forecasts that US deficits could swell to nearly 9% of GDP by 2035, up from 6.4% in 2024. This will largely stem from surging interest obligations, entitlement spending, and limited revenue growth. Meanwhile, China has trimmed its holdings of Treasuries, a move coinciding with recent trade tensions.

Still, the question remains: will this time be any different? Previous credit downgrades—like S&P’s in 2011—had limited long-term impact.

Light macro calendar, eyes on PMIs

It’s a relatively quiet week on the macroeconomic front, with few notable releases from either side of the Atlantic to meaningfully shift the EUR/USD forecast. However, Thursday’s PMI prints will warrant close attention.

The fallout from the trade war has thus far been mostly apparent in sentiment surveys, as seen again with Friday’s University of Michigan data. PMIs, though, are considered leading indicators and could stir the pot if they spring surprises.

Outside of that, there’s not much on the calendar likely to shake EUR/USD significantly. Last week, euro area Q1 growth came in just shy of expectations at 0.3%, though upbeat March industrial production (+2.6% m/m), a solid employment change (+0.3% q/q), and an improved ZEW sentiment reading from Germany all offered some cheer. The ECB appears set on a June rate cut, with even hawkish voices showing little alarm over potential inflation fallout from US tariffs.

At present, the EUR/USD forecast remains constructive, with the pair anchored near the 1.1200 level. The broader environment is still risk-friendly, and dollar sentiment remains fragile—leaving scope for a test of 1.1300, 1.1400, and potentially even 1.1500 in the coming weeks.

Technical EUR/USD forecast: Poised for a breakout?

Source: TradingView.com

From a technical viewpoint, the EUR/USD pair had been consolidating in what looks like a falling wedge—a classic continuation pattern. Today, it appears the pair is attempting to break out to the upside, having found solid support around the 1.1100 mark last week. That zone may well have established a short-term floor. The 200-day moving average, currently around 1.0800, lies comfortably below spot prices, highlighting the euro’s broader recovery since late Q1.

A daily close above the 1.1265 resistance would bolster the bullish case, opening the door to 1.1300 and then 1.1380.

On the downside, 1.1100 remains a pivotal support level. A break below could expose 1.1000, a psychologically important level and a former resistance now acting as support.

In summary, both technicals and fundamentals seem to be aligned for a cautiously optimistic EUR/USD forecast. Near-term pullbacks are likely to attract buyers, as the market eyes a further grind higher.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R