As global bond yields climb to their highest levels since 2008, some investors see signs of a looming crisis, while others view the move as the end of decades of financial repression. Let’s examine what’s driving yields higher and develop a trading plan for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- Bond yields continue to rise.
- Rising gas prices in Europe are weighing on the EUR/USD.
- Politics is hurting the euro.
- Short trades on the EUR/USD pair can be opened with targets of 1.1500 and 1.1455.
Weekly Fundamental Forecast for Dollar
In late February, the US was confident that the conflict in the Middle East would last six weeks. More than six months have now passed, and the conflict still shows no sign of ending. As a result, the risks of inflation becoming entrenched are growing due to second-order effects. Combined with other factors, these developments are driving a rally in global bond yields and providing tailwinds for the EUR/USD bears.
The US dollar is once again enjoying a preference due to its status as a safe-haven asset, the currency of a net exporter of energy commodities, and a high-yielding currency. While bulls had hoped before Jackson Hole that the Fed would keep rates on hold through the end of the year, Kevin Warsh’s speech killed that hope. The odds of a monetary policy tightening in September have jumped to 68%, while the probability of two rounds of monetary tightening in 2026 has risen to 55%.
Government Bond Yields
Source: Wall Street Journal.
Some view the rise in 10-year Treasury yields to 19-month highs, along with global bond yields reaching their highest levels since 2008, as a sign of a debt crisis. Others see it as a positive development for the bond market, which is finally emerging from decades of financial repression. In this view, governments that once benefited from cheap borrowing will now have to rein in spending.
According to Barclays, the main driver of the rise in bond yields is the market’s growing expectation that central bank interest rates will remain higher over the long term. Central banks typically avoid tightening policy when they consider higher energy prices to be a temporary shock. However, when a conflict drags on for six months rather than six weeks, policymakers have less room to wait. The ECB has already turned to monetary tightening and is prepared to do so again in September. The Fed could follow suit.
European Natural Gas Prices
Source: Bloomberg.
Meanwhile, the euro is facing pressure from rising political risks across the eurozone and a sharp increase in gas prices. Natural gas prices have surged 70% since the beginning of July, reaching their highest levels since 2023. The rapid rise in futures has prompted investors to draw parallels with 2022, when Europe faced an energy crisis, and the EUR/USD fell below parity.
The problems do not end there. In Germany, the possibility of the far-right party gaining power in regional elections for the first time since World War II could trigger capital outflows from German assets. Meanwhile, investors are already reducing exposure to French debt amid concerns that renewed clashes between parliament and the government over the budget could lead to yet another prime ministerial resignation.
Weekly Trading Plan for EUR/USD
The US dollar is benefiting from its traditional strengths, while the euro is once again facing pressure from its own vulnerabilities. As a result, the EUR/USD pair may decline to 1.1500 and 1.1455. If the price tumbles below the 1.157 support level, short positions can be considered.
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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