It might seem that the S&P 500’s decline and rising oil prices should have given bears a clear advantage in the EUR/USD. Instead, the pair rose as interest rates in the bond market continued to normalize. Let’s examine the factors behind this move and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The global bond market is returning to normal.
- Brent continues to rise amid US inaction.
- The Fed’s changing stance is weighing on the US dollar.
- Trades on the EUR/USD can be considered if the pair breaks out of the 1.156–1.16 range.
Weekly Fundamental Forecast for Dollar
Monetary and geopolitical forces continue to spark volatility in the EUR/USD. Iran is becoming increasingly assertive, targeting oil infrastructure in the Persian Gulf and tankers in the Strait of Hormuz without a symmetrical response from the US. This is fueling frustration among US allies, raising doubts about Washington’s strategy, and supporting a rally in Brent crude. However, markets are even more concerned about Treasury yields returning to levels last seen before the 2008 global financial crisis.
Back then, a massive wave of monetary easing, including quantitative easing (QE), ushered in an era of ultra-low interest rates. Now, yields are normalizing and moving back toward their previous levels—a development that is far less comfortable given the substantial increase in US national debt over the past two decades. While federal debt-service costs averaged 2.1% of GDP over the past half-century, the Congressional Budget Office estimates that they will rise to 3.3% in 2026 and could reach 4.6% by 2036.
Government Bond Yields
Source: Wall Street Journal.
Similar trends are emerging in other countries. German bond yields have climbed back to their highest levels since 2011, French yields have returned to levels last seen in 2008, and Japanese yields are at their highest since 1996. Given that Tokyo began pursuing ultra-loose monetary policy much earlier, this development is not entirely surprising.
High bond yields place pressure not only on governments but also on households and businesses. Households face rising mortgage costs, while companies must contend with higher borrowing expenses. Over time, these pressures could weigh on economic activity and increase the risk of corrections in major stock indices.
S&P 500 Index and US Treasury Yield
Source: Bloomberg.
The first warning sign was the S&P 500’s pullback from record highs. Combined with rising Brent prices, this should have strengthened the case for EUR/USD bears. Instead, the major currency pair moved higher amid concerns about the Fed’s slow response—an issue that could come into sharper focus in the minutes of the July FOMC meeting.
Alongside factors such as the conflict in the Middle East and the associated rise in inflation expectations, concerns about the budget deficit, and competition from corporate bonds attracting funds for AI investments, the rally in Treasury yields is also driven by a shift in the Fed’s outlook. Kevin Warsh wants markets to do the Fed’s job for it, forcing investors to abandon not only Treasury bonds but also the US dollar.
Weekly Trading Plan for EUR/USD
If markets conclude that the new Fed chair can win the Committee over to his policy stance, the EUR/USD rally is likely to continue. Traders should prepare for both scenarios: consider selling near 1.156 and buying if the pair breaks and holds above the 1.16 resistance level.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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