Forexlive Americas FX news wrap 19 May: The Fed is uncertain.Moody downgrade fear subsides

The late-Friday news of Moody’s downgrade of U.S. debt triggered broad market volatility to start the new trading week. Stocks opened lower, U.S. bond prices declined (sending yields higher), and the U.S. dollar weakened across the board.

At the open, the USD was sharply lower, with losses of:

• -0.90% vs EUR

• -0.81% vs GBP

• -0.45% vs JPY

By the end of the day, the dollar recovered modestly against most pairs:

• EUR: -0.70%

• GBP: -0.65%

• JPY: -0.55%

The dollar’s rebound was partial, with the decline extending further against the yen.

Bond markets saw a turnaround during the U.S. session. Earlier in the day, the 30-year yield spiked above the key 5% level, touching 5.007% at the open. However, a wave of buying brought it down to 4.904% by the close. Similarly, the 10-year yield fell from 4.536% to 4.493%, reflecting a flight to the US bonds as traders reevaluated the impact of the downgrade and realized that the US still remains a safe haven for money flows.

Equities also rebounded sharply. After falling as much as -273 points, the NASDAQ reversed course and closed marginally higher by 0.02%. The S&P 500 erased an intraday drop of -62.69 points to finish up 5.22 points, or +0.09%, marking its sixth consecutive daily gain.

The day’s news flow was driven by geopolitical developments and Federal Reserve commentary. On the geopolitical front, concerns intensified over the Israel-Gaza conflict, as Israeli Finance Minister Smotrich stated the country aims to push Gaza’s population southward and potentially out of the territory, according to Sky News Arabia. Prime Minister Netanyahu also vowed to take full control of Gaza. Israeli forces expanded their ground operations and airstrikes, reportedly killing over 100 people.

A high-profile phone call between former President Donald Trump and Russian President Vladimir Putin also captured market attention:

• From Trump’s perspective, the call was “very well” received. Trump said Russia and Ukraine would immediately begin ceasefire negotiations and highlighted Russia’s interest in expanding trade with the U.S. once the war ends. He noted that Germany, France, Italy, Finland, and the Vatican were informed of the talks, with the Vatican offering to host. Trump emphasized a diplomatic tone and the potential for mutual economic benefit post-conflict.

• From the Kremlin’s perspective, the call focused on normalizing U.S.-Russia relations, including discussions of a potential prisoner swap involving nine detainees from each country. Trump reportedly spoke emotionally about the desire to restore strong ties and identified Russia as a key future trade partner. While both leaders agreed to maintain dialogue and prepare for a personal meeting, the Kremlin clarified that no ceasefire timeframe was discussed. Moscow also noted Trump’s preference for diplomatic agreements over sanctions, and expressed support for U.S. efforts in the Middle East and Iran.

From the Fed today, the theme from monetary policy perspective was that of uncertainty:

• Atlanta Fed President Raphael Bostic this morning on CNBC warned that Moody’s downgrade could have wide-reaching effects across the economy and financial markets, particularly by raising the cost of capital and introducing greater uncertainty. He emphasized that it may take several months to fully understand the impact on U.S. debt demand and inflation from tariffs. Bostic noted the Fed is cautious on rate cuts, leaning toward just one this year due to the complex interplay of inflation, tariffs, and economic sentiment. While markets are functioning well, inflation remains above target and expectations are moving in a troubling way, although firms aren’t planning large layoffs. He highlighted a disconnect between economic sentiment and data and pointed to potential ripple effects from even reduced tariffs on China
• New York Fed President John Williams struck a cautiously optimistic tone in his remarks to the Mortgage Bankers Association, noting that recent economic data has been “very good” and the labor market is now “pretty much in balance.” He acknowledged that inflation continues to decline slowly and monetary policy remains “in a good place,” characterizing it as slightly restrictive. While first-quarter growth was affected by unusual trade dynamics, Williams emphasized that uncertainty—particularly around trade—is a defining feature of the current economic environment. He noted that many businesses and households are in a “wait-and-see” mode. Williams said the Fed still has work to do in reducing its balance sheet, though the process so far has not disrupted market pricing. He reassured that the U.S. dollar retains its status as the world’s reserve currency and that investor demand for Treasuries remains strong. Core fixed income markets, he added, are functioning well. On the consumer side, Williams observed that while households remain generally healthy, there are early signs of increasing caution. He expects the economy to slow this year and stressed that the Fed can take its time with future policy decisions. He also warned that tariffs could add upward pressure to inflation and increase unemployment risks.
• FOMC Governor Philip Jefferson emphasized that the potential impact of tariffs on the Fed’s dual mandate of price stability and full employment is a key concern. He noted that the risks to inflation and jobs will largely depend on policy decisions from the administration, many of which have not yet been finalized. Jefferson warned that tariffs could lead to a one-time rise in price levels and stressed the importance of preventing such increases from becoming embedded in inflation expectations. He reiterated the Fed’s commitment to maintaining current policy to ensure inflation remains anchored. While acknowledging the labor market’s resilience so far, he said it is still too early to assess how new trade policies might affect employment. Jefferson also confirmed that there are no active discussions about altering the Fed’s ample reserves framework. On the Moody’s downgrade of U.S. debt, he indicated the Fed will treat it like any other piece of incoming data—evaluating its implications for inflation and the labor market.