Fitch, one of the major independent agencies assessing creditworthiness, recently made a significant move by downgrading the US government’s credit rating from the highest level of AAA to AA+. This move has raised concerns among investors, who often use credit ratings as a benchmark to gauge the risk of lending money to a government. Until now, the US has been considered a highly secure investment due to the size and relative stability of its economy.
The downgrade was prompted by mounting worries over the state of the country’s finances and its increasing debt burden. The timing and reasoning behind the downgrade have caught many economists off guard, and US Treasury Secretary Janet Yellen has called it “arbitrary.”
In June, the US government managed to raise the debt ceiling to a staggering $31.4 trillion, but the process was fraught with political battles that threatened the country with the possibility of defaulting on its debts. Fitch explained its decision, stating that the rating downgrade reflects the expected fiscal deterioration over the next few years, a significant and growing general government debt burden. The agency also predicts that the US may slip into a mild recession later this year.
The EUR/USD pair gained bullish strength and progressed towards 1.1000 during the American session on Friday. The July employment report for the US revealed a rise of 187,000 in Nonfarm Payrolls, along with a downward adjustment to June’s figures. As a result, the US Dollar demonstrated a decline in comparison to its competing currencies. The employment report remains indicative of a robust job market, even though it exhibited fewer-than-anticipated job additions, marking the lowest monthly increase since December 2020.
Meanwhile, in the UK, the Bank of England made a move to raise interest rates by a quarter of a percentage point to 5.25%, reaching a 15-year peak.
Governor Andrew Bailey and colleagues have pledged to maintain a sufficiently restrictive monetary policy to bring down inflation to the Bank of England’s 2% target, although this may not be achieved until the first quarter of 2025. This decision has led to concerns for UK businesses, consumers, and homeowners, who will continue to face high borrowing costs. Consumer prices in the UK rose at an annual pace of 7.9% in June, adding to the worries.
Governor Bailey refrained from indicating when the Bank of England might consider cutting rates, but it is likely to occur after the US Federal Reserve and the European Central Bank make similar moves. Money market indicators suggest that US rates have peaked and the Federal Reserve may start cutting rates in mid-2024, with the European Central Bank following a month or two later.
The UK is still experiencing higher inflation compared to other advanced economies where hopes are rising that interest rates may be close to a peak. The pound faced downward pressure and dipped to a five-week low of $1.2623 shortly after the Bank of England’s decision was announced. This could have implications for UK businesses that have already faced challenges in recent years.