FX.co ★ Fitch Ratings downgrades long-term credit rating for US. Does it matter to market sentiment? EUR/USD could grow while USD/JPY could go down

The first day of August was not as positive as anticipated. An unexpected downward revision in the US credit rating announced by Fitch spoiled sentiment across financial markets. The question is whether it ruined optimism completely.

On Tuesday, it became known that Fitch Ratings downgraded the US long-term credit rating from AAA to AA+ due to uncertainty related to fiscal policy and governance. The agency cited "the expected worsening of the financial condition over the next 3 years, the still high and growing public debt burden, and the erosion of public administration". The agency also referred to the repeated political standoffs over public debt and last-minute resolution of the issue, which undermined the credibility of financial management. In fact, the Fed's decision to raise the key interest rate at the policy meeting in July, as well as new gossip around the public debt stimulate new fears and general uncertainty about what investors can expect in the future and, first of all, in the near future.

Of course, in the wake of the news, world stock indices, primarily American ones, came under pressure. At the same time, the dollar as a safe-haven currency received support. The US dollar index closed the New York session on Tuesday above 102.00 points, according to the dynamics of the ICE index. But today the situation has changed somewhat, and DXY's upward impulse has slowed down.

Should we expect further strengthening of US dollar?

We believe not. Yes, yesterday the markets bounced off negative news, recorded partial profits and are now looking forward to the publication of fresh economic statistics from America, where the data on the number of new jobs will play an important role. The ADP employment report is due today which, according to the consensus, should log a decline in new job growth. The US private sector added only 189,000 jobs in July against 497,000 in June. But in general, even such values, if they turn out to be not lower than expected, still show the labor market as quite strong.

If the data turns out to be slightly lower than expected, this may traditionally crush the US dollar. At the same time, higher-than-predicted figures may support the dollar locally, but this is unlikely to turn into a strong rally. First, the official nonfarm payrolls which are due on Friday are still high on the agenda. Second, as we have repeatedly pointed out earlier, the rate hike cycle in America is coming to an end. So, if the Federal Reserve raises the funds rate again by 0.25%, then this could be the end of the tightening policy. On the contrary, we still expect that the US dollar will remain under pressure against the basket of major currencies, the dynamics of which are reflected by the ICE index.

Intraday forecast

EUR/USD

The currency pair is trading within a medium-term uptrend. EUR/USD found support at about 1.0950. The price may rebound first to 1.1080 and later to 1.1255. The main condition for such market behavior is the bullish sentiment on the euro and expectations of further rate hikes by the ECB. Besides, a good omen for EUR/USD could be the Bank of England's decision on raising interest rates tomorrow.

USD/JPY

The market toned down concerns following the news from Fitch Ratings. As a result, USD/JPY might come under pressure because traders will shift focus away from the greenback as a safe haven asset. If USD/JPY falls below 142.75, it could plunge lower to 141.00.