The credit rating downgrade of the USA by the agency Fitch Ratings did not make a significant impression on the markets; however, it contributed to the rise in Treasury bond yields and the strengthening of the American dollar. Several events occurred, including the Department of Treasury's announcement of the issuance of long-term bonds for $103 billion per week and the publication of strong statistics for the United States. These events suggest that the federal funds rate will remain at a plateau, at least until March 2024. Therefore, bears on EUR/USD may not worry about their future for now.
According to Credit Agricole, the market's reaction to events in 2011 and 2023 is fundamentally different because, unlike the events 12 years ago, the United States is not on the verge of default now. If the rating downgrade had happened in May–June, a serious storm could have been expected. Moreover, Fitch acted very cautiously. Not only did the agency warn about its possible actions back in late spring, but it also raised the forecast for the U.S. rating from "negative" to "stable."
At the same time, the fact of the rating downgrade has returned investors' attention to fiscal problems. The budget deficit is growing rapidly due to the increase in the debt ceiling. The government needs money to finance various programs. That's why it announces auctions for $1 trillion during the third quarter and $103 billion per week.
Dynamics of the U.S. debt and bond yields.
Simultaneously, the Bank of Japan's refusal to control the yield curve and the transition to flexible regulation has led to rumors of the start of monetary policy normalization and capital flows from North America and Europe to Asia. This has become another reason for investors to get rid of bonds, resulting in their yields rising.
Let's not forget about the strong statistics on the U.S. labor market. Employment growth in the private sector from ADP exceeded all Bloomberg experts' estimates. Despite a decrease in the number of vacancies and layoffs, the indicators remain above pre-pandemic levels. If the non-farm payrolls also pleasantly surprise, the Treasury yields and the U.S. dollar will continue their rally. However, for EUR/USD to start, it is necessary to pass the test of statistics on jobless claims and business activity in the services sector from ISM.
Dynamics of financial market volatility
The rise in U.S. debt market rates to November highs leads to increased volatility and a decline in clearly overvalued American stocks. The decrease in global risk appetite creates favorable conditions for safe-haven assets, primarily the American dollar. In this background, the 4-day rally of the USD index looks natural.
Technically, on the daily chart, EUR/USD is fully working out the Three Indians pattern, supported by the 1-2-3 pattern. The combination of reversal patterns renders the resistance of the "bulls" useless. The targets for previously opened shorts at 1.089 and 1.084 are getting closer. The recommendation is to hold and increase them.
