Before the 2008 global financial crisis, the Treasury handled debt management exclusively. The Fed’s introduction of quantitative easing (QE) changed everything. Now, the Treasury wants to return to the old way. How will the central bank respond? Let’s examine this issue and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- A conflict has emerged between the Fed and the Treasury.
- An alliance between the two institutions could put significant pressure on the US dollar.
- The Fed is not a one-man institution.
- Short positions can be considered as long as the EUR/USD remains below 1.1690.
Daily Fundamental Forecast for Dollar
2026 has been a year of wars. A conflict erupted in the Middle East at the end of winter. By the end of summer, two more confrontations had emerged: a trade dispute between the US and Canada and a financial standoff between the Treasury and the Fed. Scott Bessent’s push to lower Treasury yields sent the EUR/USD pair soaring, hitting Kevin Warsh. However, Warsh argues that higher interest rates will allow the debt market to do the Fed’s job for it. Is the conflict between the two institutions really as obvious as it seems?
Since the latest FOMC meeting, long-term Treasury yields have climbed to 19-year highs, prompting the Treasury to announce an increase in the minimum volume of bond purchases. According to a Treasury spokesperson, the department handled debt management before the 2008 global financial crisis. The Fed then stepped in and, with the launch of quantitative easing, took on a much larger role in the process. Now, Scott Bessent wants to bring debt management back under the Treasury’s control.
30-Year Treasury Yield
Source: Bloomberg.
At first glance, the Treasury’s intention to lower Treasury yields appears to run counter to the Fed’s approach to balance-sheet reduction and Kevin Warsh’s argument that rising rates in the debt market will tighten financial conditions and eliminate the need for further monetary tightening. This apparent contradiction triggered a sell-off in the US dollar. Investors feared that the Treasury would effectively take over some of the Fed’s functions, even though the two institutions have different mandates. The central bank is responsible for maintaining price stability and supporting employment, while the Treasury manages the budget deficit and public debt.
But why shouldn’t the two institutions work in tandem? Citrini Research points to the emergence of a Fed-Treasury alliance. The Fed is shrinking its balance sheet by selling Treasuries to banks, whose balance sheets are expanding. At the same time, the Treasury is reducing the volume of long-term bond issuance and turning to short-term securities instead. Yields on long-term Treasuries are falling.
Such an alliance could, in fact, deal a blow to the dollar by giving investors fresh evidence of the close ties between Kevin Warsh and the US administration. It would also help explain why Scott Bessent did not become Fed chair while bringing the US president closer to his goals of lower interest rates and a weaker currency.
The Fed is not a one-man show. If inflation remains elevated while Treasury yields continue to fall, the number of hawks within the central bank could increase, prompting the Fed to tighten monetary policy—regardless of how strongly Kevin Warsh and Donald Trump might oppose it.
Daily Trading Plan for EUR/USD
Markets are unlikely to immediately grasp the intricacies of the political dynamics. Therefore, the EUR/USD pair may face a roller-coaster ride in response to Kevin Warsh’s speech in Jackson Hole. Ultimately, the result matters. If the euro consolidates above 1.1690, that would signal a resumption of buying. Failure to break and hold above this level, however, would provide grounds for adding to short positions opened at 1.1700.
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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