U.S. Treasury Secretary Scott Bessent’s policy is proving its effectiveness, despite initial market skepticism. The combination of targeted, albeit marginal, sanctions against Iran and signals of the Treasury’s readiness to intervene in the government bond market is yielding tangible results.
The decline in Brent prices is driven not only by these measures but also by the resumption of diplomatic dialogue between Iran and Oman regarding the operation of the Strait of Hormuz. The confluence of factors—falling energy prices and Treasury actions to curb Treasury yields—has triggered a rally in equity markets and halted the downward correction of the EUR/USD pair.
Formally, the decline in Treasury yields and oil prices, against the backdrop of a rising S&P 500, creates a favorable macroeconomic (risk-on) backdrop for the single European currency. However, the structural vulnerability of the Eurozone is once again making itself felt through political instability in France. Another round of parliamentary debates over the draft state budget, which has historically led to the resignations of prime ministers, is driving up the yield spread between French (OAT) and German (Bund) government bonds—a key indicator of sovereign risk in the region.
The failure to pass the budget threatens France with maintaining the highest deficit-to-GDP ratio among major European economies and an uncontrollable surge in sovereign debt leading up to the 2027 presidential elections. In this context, the current budgetary debates represent the most serious political challenge for Emmanuel Macron’s administration to date.
Historical precedent shows that political crises in France inevitably translate into heightened EUR/USD volatility. Under current conditions, investors will have to navigate a complex web of contradictory factors: geopolitical tensions, trade wars, and the erosion of trust in the U.S. dollar amid institutional friction between the White House and the Federal Reserve.
At the same time, the risk of a renewed monetary tightening cannot be ignored. As FOMC member Susan Collins emphasized, in the absence of sustained evidence of a disinflationary trend, the Fed will be forced to maintain its hawkish rhetoric. Two reports on slowing inflation may not be enough to shift the paradigm, especially given the potential for a summer rally in the oil market (Brent), which could once again stoke inflation expectations.
Thus, the French political factor introduces additional uncertainty into the already turbulent outlook for EUR/USD. To navigate the current market environment, market participants must conduct comprehensive monitoring not only of the currency market but also of the commodity (oil), debt (OAT-Bund spreads), and equity markets, as it is their confluence that will dictate the short-term impulses for the pair.
