Markets are increasingly pricing in a 92% probability that the Fed will tighten monetary policy in September. The shift in expectations has pushed the 10-year US Treasury yield to 5% for the first time since 2023, while also providing fresh support for the US dollar. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US administration is prepared to tolerate rising interest rates.
- The yield on 10-year Treasuries has reached 5%.
- The correlation between the dollar and interest rates is increasing.
- Short trades on the EURUSD pair formed at 1.164 can be maintained.
Weekly Fundamental Forecast for Dollar
Last year, Donald Trump repeatedly called on the Fed to cut interest rates and even threatened its chairman when he refused to do so. In 2026, however, the US president appears willing to tolerate tighter monetary policy from the central bank chief he appointed himself. This remarkable shift in stance may help explain the renewed strength of the US dollar. The EUR/USD pair came close to recording its sharpest decline since June 17—ironically, the very day Kevin Warsh caught markets off guard with unexpectedly hawkish rhetoric.
Euro bears, however, were denied a deeper move lower by a pullback in oil prices after reports that Saudi Arabia planned to increase export flows through the Strait of Hormuz to offset losses from the closure of the East-West pipeline. Meanwhile, the yield on the benchmark 10-year US Treasury briefly touched the psychologically significant 5% level. It was the first time since 2023 that the yield had reached that mark, when the post-pandemic economic boom and the Fed’s most aggressive monetary tightening cycle in four decades pushed borrowing costs sharply higher.
10-Year US Treasury Yield
Source: Bloomberg.
At the same time, the correlation between the US dollar and Treasury yields continues to strengthen. This suggests that the dollar’s recent rally is being driven less by Treasury sell-offs stemming from uncertainty over US administration policy or concerns about the Fed’s independence, and more by developments in oil prices and growing confidence in the Fed’s hawkish stance. Markets are now pricing in a 92% probability of a rate hike in September, while expectations for the terminal rate have risen to 4.5%. At this time last year, markets expected the policy rate to fall as low as 3%.
Fed Funds Rate and Market Expectations
Source: Bloomberg.
Several factors are driving the rally in Treasury yields, including the AI boom, which is boosting demand for electricity, increased competition from hyperscalers issuing bonds, and the resilience of the US economy. However, the dominant factor is the ongoing conflict in the Middle East. What was once expected to be resolved within six weeks has instead dragged on, with no clear end in sight to the standoff between the United States and Iran.
This raises the risk that elevated energy prices could feed into core inflation through second-round effects, increasing pressure on the Fed to act quickly.
All eyes are now on Kevin Warsh. Markets expect not only a hike in the federal funds rate, but also guidance on the path for monetary policy that follows. At a minimum, investors will be looking for clues in the updated FOMC projections. Notably, markets have largely set aside their previous expectations of four ECB rate hikes and five Bank of England hikes over the next 12 months.
Weekly Trading Plan for EUR/USD
The current market move resembles buying the US dollar on expectations of a rate hike. The key question is whether the classic “buy the rumor, sell the news” dynamic will take hold once the decision is officially announced. For now, short positions established at 1.1640 on the EUR/USD pair can be kept open.
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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