As soon as New York Fed President John Williams said the Fed didn’t need to raise rates immediately, the odds of an October rate hike dropped sharply, and EUR/USD bears retreated. Let’s discuss this and build a trading plan.
The article covers the following subjects:
Major Takeaways
- The rally in Treasury yields is causing panic.
- The Fed’s doves are in no hurry to raise rates.
- Lagarde’s dovish rhetoric has put pressure on the euro.
- Some short positions in the EURUSD pair can be closed.
Weekly Fundamental Forecast for Dollar
Over the past six months, oil has been the main focus of financial markets. In September, however, bonds took center stage. Yields on 10- and 30-year US Treasuries climbed to their highest levels since 2022, with the surge in yields advancing at its fastest pace since the US introduced tariffs in April 2025. What makes the move particularly notable is that it has occurred without major fresh developments on inflation, GDP growth, the Fed’s monetary policy, or competition from hyperscalers for resources. Whether you like it or not, the scale of the move is unsettling. Rising yields and growing market uncertainty are weighing on the euro, pushing the EUR/USD to a 16-month low.
30-Year US Treasury Yield
Source: Bloomberg.
The bond market is trying to gauge where the federal funds rate will settle once the Fed’s monetary tightening cycle comes to an end. Yields on two-year Treasury bonds are around 4.9%, implying expectations for three to four additional rate hikes. According to CME derivatives, the probability of three monetary policy tightening moves over the next 12 months stands at 85%, while the probability of four is 58%.
Both Treasury bonds and futures contracts suggest that the Fed may need to tighten monetary policy more aggressively than indicated in its official forecasts. This has contributed to the fastest monthly rise in the US dollar since June. However, these elevated expectations could ultimately backfire on the greenback.
US Dollar Index Monthly Change
Source: Bloomberg.
John Williams’ statement that a rate hike by year-end appears appropriate came as a cold shower for EUR/USD bears. The Fed may need more time to assess incoming data before tightening monetary policy further. The president of the New York Fed sees no urgency to act following the monetary policy changes implemented in September.
As a result, the derivatives market sharply reduced the probability of an October rate hike, from 73% to 53%, allowing the EUR/USD to find a bottom and rebound. This came despite a recent dovish surprise from Christine Lagarde, who said that rising bond yields have tightened financial conditions. In her view, this could help contain inflation even without further action from the ECB. Her comments sent the major currency pair to its lowest level since May 2025.
The euro is also finding support as Brent crude fell below $100 per barrel amid reports of increased oil exports from the Middle East. According to JPMorgan, oil supplies have recovered to 17.5 million barrels per day, or 98% of pre-war levels. Goldman Sachs puts the figure at 23.3 million barrels per day, including so-called underground flows. That level is broadly in line with the 2025 average.
Weekly Trading Plan for EUR/USD
If the Fed does not raise interest rates in October, this could provide a strong argument for taking profits on EUR/USD short positions, even if the 1.13 target has not been reached. However, the latest US labor market data will ultimately be crucial in determining the Fed’s next move. The figures could shift the balance between the dovish and hawkish camps within the FOMC.
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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