- The dollar collapsed after Moody’s downgraded the US government’s credit rating.
- The Financial Times reported that serious trade talks between the US and the Eurozone had begun.
- One year US inflation expectations jumped from 6.5% to 7.3%.
Currency futures soared against the dollar on Monday after Moody’s downgraded the US government’s credit rating. However, the dollar ended last week higher amid easing trade tensions and cooling fears of a US recession.
Currency futures gained on Monday as the dollar collapsed after Moody’s credit rating downgrade intensified worries about US debt. Moody’s cut the rating by one notch on Friday. Meanwhile, market participants were looking forward to business activity data from several major economies, including the US and the Eurozone.
Last week, the dollar started strong after China and the US announced a trade truce, easing concerns about the global economy. The two countries agreed to slash tariffs for 90 days. China cut tariffs on US imports from 125% to 10%. At the same time, the US cut tariffs on Chinese imports from 145% to 30%. The deal came at a time when economists were predicting a likely US recession. Therefore, it came as a relief for the dollar.
Furthermore, it opened the door for more trade deals with other countries. Already, the US has signed deals with China and the UK. On Monday, the Financial Times reported that serious trade talks between the US and the Eurozone had begun. Moreover, market participants are hoping for deals with Japan, India and South Korea.
Traders also paid attention to US economic data on inflation, retail sales and consumer sentiment. US consumer inflation increased by 0.2% compared to expectations of a 0.3% increase. Meanwhile, the annual figure came in at 2.3%, missing forecasts of a 2.4% increase. Wholesale inflation was also lower than expected, boosting bets for a Fed rate cut in September.
US consumer sentiment and inflation expectations (Source: UoM)
A separate report revealed an unexpected drop in consumer sentiment as worries about Trump’s tariffs lingered. This also increased rate cut bets. Market participants are currently pricing a 67% chance of a rate cut in September.
However, one year inflation expectations jumped from 6.5% to 7.3% putting a lid on rate cut bets. Consumers expect inflation to increase after Trump’s tariffs which have boosted import prices. Consequently, the dollar ended the week strong while currency futures weakened.
