Will the ECB follow the US Treasury’s lead? The Treasury’s announcement of a $6 billion Treasury buyback disappointed the bond market and triggered a pullback in the EUR/USD. Now, attention turns to the European Central Bank. Let’s examine the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The US Treasury failed to stop yields from climbing to multi-year highs.
- The ECB is expected to raise its deposit rate.
- The EU made a costly mistake by postponing its gas purchases.
- Short trades can be opened below 1.162.
Daily Euro Fundamental Forecast
Some call it asymmetric information; others call it a bluff. For the fourth time in three weeks, Scott Bessent has warned investors not to buy oil and sell the yen or Treasuries. “I have asymmetric information. I am the house now,” the US Treasury Secretary said. His message is clear: he believes he knows something the market doesn’t—and is challenging investors to trade against him. The strategy worked with the USD/JPY but failed with Brent crude and Treasury yields. As a result, the EUR/USD has retreated, easing one of the concerns weighing on the pair. The second risk, however, remains firmly in place: the ECB could prove to be more hawkish than the market expects.
The US Treasury Secretary is setting the bar remarkably high, making his warnings increasingly difficult to justify. His approach bears a striking resemblance to Donald Trump’s negotiating tactics: threaten to go all the way, then ultimately settle for less. The difference is that while the US administration is negotiating with other countries, Bessent is effectively negotiating with the markets—and his opponents may prove considerably tougher. The Treasury’s announcement of a $6 billion buyback of long-term Treasuries disappointed investors, who expected a more aggressive move. Yields rose, putting the brakes on the EUR/USD rally.
10-Year US Treasury Yield
Source: Bloomberg.
Next up is the ECB, with its monetary-policy firepower—and a clear reluctance to repeat past mistakes. The most notable example is 2022, when delays in tightening policy pushed eurozone inflation above 10%. This time, the ECB has responded almost immediately to the conflict in the Middle East, having already raised rates once. Markets are pricing in three more rounds of monetary tightening by mid-2027, while Bloomberg economists expect the ECB to remain on hold for an extended period. If markets are right, the EUR/USD could have further room to rise.
However, the parallels with 2022 should extend beyond monetary policy to the energy market. And here, the EU may have already made a costly mistake by betting on a quick resolution to the standoff between the US and Iran. LNG purchases were postponed in the hope that conditions would improve—only for that window of opportunity to disappear. Now, natural gas reserves are running low, leaving Brussels with fewer options and little more than hopes for a mild winter. A renewed energy shock could therefore become a major headwind for the euro, complicating the ECB’s policy dilemma and potentially limiting EUR/USD’s upside.
Natural Gas Reserves in Europe
Source: Wall Street Journal.
Four years ago, the energy crisis, combined with Liz Truss’s resignation as British prime minister, sent shockwaves through European markets and weighed heavily on the region’s currencies. EUR/USD eventually plunged below parity. Today, history appears to be rhyming. Not only is French Prime Minister Sébastien Lecornu’s position under pressure, but German Chancellor Friedrich Merz is facing political challenges of his own. With political instability, energy risks, and the ECB’s policy path all in question, the euro once again faces a potentially toxic mix of headwinds. If the ECB disappoints markets, as Scott Bessent did, it could trigger a sell-off in the euro.
Daily EURUSD Trading Plan
Selling the EUR/USD on the news after buying on the rumors looks like a highly rational strategy. Faced with the prospect of an energy and political crisis, the ECB is likely to favor caution over reckless risk-taking. If the central bank disappoints expectations, the euro could come under significant pressure. Against this backdrop, the preferred entry levels for short positions are 1.1620, 1.1665, and 1.1710.
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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