The resumption of the downtrend in EUR/USD is just around the corner. Oil prices and Treasury yields have resumed their rallies, while investors expect hawkish signals from the Fed. What more does the US dollar need to strengthen? Let’s discuss this topic and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed intends to signal its plans for December.
- FOMC officials are speaking more frequently.
- Trump’s policies have helped fuel the rally in Treasury yields.
- A breakout below 1.1115 will be a signal to build up EUR/USD short positions.
Weekly Fundamental Forecast for Dollar
When Kevin Warsh stays silent, other FOMC members fill the void. The new Fed chair wants to talk less and do more, but his colleagues appear to have a different approach. Between the two Committee meetings, 16 officials delivered 59 speeches, compared with 54 over the same period in 2025. Their remarks convinced markets that interest rates would remain unchanged in October. However, economic data suggest otherwise, pushing EUR/USD lower.
Changes in the Probability of an October Fed Rate Hike
Source: Wall Street Journal.
Just a month ago, futures markets priced in a 70% probability of monetary tightening in October. However, speeches by FOMC officials convinced investors that the Fed needed to pause. With inflation accelerating, GDP growing, and the labor market remaining strong, one of the few reasons for the Fed to pause its rate hikes is its reluctance to disappoint markets. Isn’t that what Kevin Warsh wanted? For markets to stop hanging on the Fed’s every word and instead determine for themselves what the central bank should do?
There are far more arguments for tighter monetary policy. Current interest rates appear low, though not by historical standards. They are simply failing to restrain either inflation or economic growth. The FOMC’s estimate of the neutral interest rate is well below market expectations of 4.3%.
Fed and Market Estimates of the Neutral Interest Rate
Source: Wall Street Journal.
All things considered, the Fed has little choice but to signal that its monetary tightening cycle will resume in December. Investors’ confidence in hawkish Fed rhetoric is pushing EUR/USD lower.
Moreover, the broader market environment remains unchanged. Fears of an escalation in the Middle East conflict, with the US and Israel potentially resuming strikes on Iran after the US midterm elections, are driving Brent crude back above $115 per barrel. Treasury yields are rallying alongside oil prices.
Treasury Purchases by US-Allied Countries
Source: Bloomberg.
Interestingly, Donald Trump has also contributed to the surge in Treasury yields to their highest levels since 2002. His tariff policies have reduced the trade surpluses of US trading partners, prompting them to buy fewer Treasury securities. According to the US Treasury Department, allied countries purchased $174.3 billion worth of Treasuries between January and August, the lowest figure since 2021. When buyers leave the market, yields rise.
Developments in the oil and bond markets, together with the Fed’s readiness to resume tightening in December, suggest that the downtrend in EUR/USD could soon resume.
Weekly Trading Plan for EUR/USD
Only Kevin Warsh seems capable of disappointing EUR/USD bears. Even so, an attempt to repeat his July move by suggesting that markets should do some of the Fed’s work is unlikely to undermine the US dollar. After all, Treasury yields have fallen. Therefore, a break below the 1.1115 support level would provide an opportunity to add to EUR/USDshort positions opened at 1.118.
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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