Market update: USD and Dow Jones sink as Fitch downgrades US credit rating

US credit rating downgraded by Fitch

The US dollar, Dow Jones, S&P 500, and Nasdaq 100 took a hit after news surfaced that Fitch, a crucial credit rating agency, lowered the US score from AAA to AA+. This adjustment partially mirrors the "expected fiscal deterioration over the next three years," and a lack of significant progress in addressing medium-term challenges linked to rising social security and Medicare costs.

Demographic challenges intensify fiscal issues

These escalating costs are particularly crucial given the country's aging population. As per the Congressional Budget Office (CBO), the growth of the 65-or-more age group is predicted to outstrip increases of younger cohorts, leading to a demographic shift.

This evolution complicates the sustainability of a system primarily funded by prime-age participants.

The intersection of credit rating and market reactions

While financial markets have experienced previous instances of US credit ratings downgrades, the impacts on equities have typically been short-lived.

However, the current situation differs as rising interest rates have been augmenting the cost of debt, with the CBO projecting that annual net interest costs could almost double over the next decade.

CBO forecasts and congress' fiscal approach

There seems to be limited inclination from Congress to enact fiscal austerity, which entails reducing government spending or hiking taxes to decrease deficits. This strategy effectively functions like monetary tightening, slowing the economy when necessary.

However, according to CBO projections, the budget deficit is expected to escalate to 7% of GDP by 2033 from the current 5.3%.

Potential impact on Wall Street and broader market

It remains uncertain how this situation will influence Wall Street in the long run. A ratings downgrade would likely push up government debt costs further from already increasing levels, potentially discouraging the Federal Reserve from hiking rates.

Meanwhile, the drop in Wall Street futures may indicate a risk-averse session for Asia-Pacific markets in the upcoming Wednesday trading session.

US dollar technical analysis

The US dollar has rejected the 50-day Moving Average (MA) after the latter held as resistance. But, the DXY remains above the 100.82 – 101.02 inflection zone. In the event of further downside progress, keep a close eye on this zone for key support. Otherwise, extending higher places the focus on falling resistance from March.

DXY daily chart

Dow Jones technical analysis

Meanwhile, the Dow Jones is sitting just under the February 2022 high of 35752. A rejection of this resistance could send prices down toward the 20-day MA. This could hold as support, maintaining the upside bias. Broadly speaking, rising support from October is still guiding the Dow Jones upward. It would take a series of losses to overturn the bullish technical landscape.

Dow Jones daily chart

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