The clash between monetary and geopolitical factors continues to drive high volatility in the EUR/USD pair. Iran is escalating attacks on oil infrastructure in Persian Gulf nations and tankers in the Strait of Hormuz, without facing a symmetrical response from the US. This is fueling dissatisfaction among American allies, increasing skepticism regarding Washington’s strategic clarity, and supporting a rally in Brent crude. Nevertheless, global capital markets are demonstrating a deeper concern over another trend: the return of US Treasury yields to levels not seen since the 2008 Global Financial Crisis.
If the massive monetary easing and Quantitative Easing (QE) programs of that era ushered in an age of ultra-low interest rates, we are now witnessing the reverse process—normalization and a return of yields to historical averages. This shift carries severe macroeconomic risks. Over the past two decades, the volume of sovereign debt has increased substantially. If US debt service costs averaged 2.1% of GDP over the last 50 years, the Congressional Budget Office (CBO) estimates this figure will reach 3.3% in 2026, and risks climbing to 4.6% by 2036.
Similar structural shifts are being recorded in other developed markets. German government bond yields have returned to their 2011 highs, French yields to 2008 levels, and Japanese yields to 1996 marks. For Tokyo, such an increase appears particularly logical, given that the Bank of Japan adopted ultra-loose monetary stimulus significantly earlier than its peers.
Rising debt market yields exert negative pressure not only on government budgets but also on the real economy. Households are facing more expensive mortgage lending, while the corporate sector is grappling with higher borrowing costs. In the long term, this creates fundamental prerequisites for a correction in equity markets.
The first negative signal was the retreat of the S&P 500 from its all-time highs. Formally, combined with the oil rally, this factor should have supported EUR/USD bears. However, in practice, the single European currency continued to advance. The primary driver has been concerns over the Fed’s overly sluggish reaction, which will likely be reflected in the minutes of the July FOMC meeting.
The rise in Treasury yields is driven by a complex of factors: the Middle East conflict and associated inflation expectations, budget deficit risks, and intense competition for capital from corporations raising funds for AI projects. However, the key driver is a paradigm shift in monetary policy. Kevin Warsh’s strategy of offloading the burden of monetary tightening onto market mechanisms is forcing investors to rebalance their portfolios, shedding not only Treasury bonds but also US dollar positions.
The outlook for the EUR/USD pair will depend on whether the new Fed Chair can consolidate the Committee around his stance. If the market concludes that Warsh’s “dovish” course is dominant, the euro’s rally will gain further momentum. Under current conditions, traders should account for two-way risks: consider selling near the 1.1560 level and opening long positions in the event of a decisive breakout above the 1.1600 resistance.
