Bears’ concerns, driven by falling Treasury yields and the ECB’s hawkish rhetoric, currently outweigh the positive factors stemming from the escalating conflict in the Middle East and rising oil prices. Let’s examine the situation and develop a trading plan for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- Brent is flirting with the $100-per-barrel mark.
- Markets are awaiting an announcement on Treasury buybacks.
- The ECB is struggling to meet investors’ expectations.
- Consider short trades on a pullback from 1.1665 and 1.171.
Weekly Fundamental Forecast for Dollar
The anticipation of death is worse than death itself. That may be the only way to explain the rally in the EUR/USD against the backdrop of an escalating conflict in the Middle East, Brent crude surging above $100, and Treasury yields hovering near multi-year highs. Bears appear to fear the Treasury’s announcements about the scale of Treasury bond buybacks and the ECB’s hawkish rhetoric.
US Treasury Yield
Source: Bloomberg.
A lot has happened since Scott Bessent’s Treasury Department shocked markets on August 19 by announcing it would raise the minimum purchase size for long-term Treasuries to $4 billion per transaction. Now it’s time to back up those words, and investors are speculating about the new figure. A $4 billion purchase would likely be viewed as disappointing, potentially allowing Treasury yields to continue rising in the near term. A $5–6 billion figure appears to be the most likely outcome, while a significantly larger purchase could trigger a mixed market reaction.
Morgan Stanley is reportedly targeting as much as $10 billion. Such a move would shake up the bond market and send yields sharply lower. This is precisely what the EUR/USD bears fear. On the other hand, this buyback amount could signal that Scott Bessent remains uneasy about developments in the bond market, potentially triggering another sell-off in Treasuries and a rise in yields.
The ECB meeting could prove no less consequential for the EUR/USD. Few doubt that Christine Lagarde and her colleagues will raise the deposit rate from 2.25% to 2.5%. The real question is how far the European Central Bank might go from there. The derivatives market is pricing in borrowing costs rising to 3% by mid-2027, a scenario that is difficult to justify without considering the potential second-order effects. Moreover, rates at that level could risk stifling economic growth.
Market Expectations for ECB Interest Rate
Source: Bloomberg.
In reality, the ECB must act with an eye toward a potential energy crisis, rising political risks, and elevated European bond yields. Any attempt to fan the flames of the bond-market sell-off through hawkish signals could come at a high cost to the eurozone economy. For the EUR/USD to sustain its upward trend, the ECB would need to take an aggressive stance. However, given the risks, it is far more likely to err on the side of caution.
It turns out that the bears may have little to fear. Whatever figure Scott Bessent announces for the buyback of long-term Treasuries, it is unlikely to be large enough to reverse the upward trend in yields. Likewise, it is doubtful that the ECB will want to validate the derivatives market’s expectations of a rise in the deposit rate to 3%, given the numerous economic and political contradictions facing Europe.
Weekly Trading Plan for EUR/USD
A break above 1.164 could pave the way for a continued EUR/USD rally toward 1.1665 and potentially 1.171. However, a rebound from either level or a return to the 1.158–1.164 consolidation range could offer selling opportunities.
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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