There is nothing more permanent than the temporary. Back in late February, the United States expected the conflict in the Middle East to last roughly six weeks. More than six months have now passed, and there is still no end in sight. This raises the risk that inflation could become entrenched through second-round effects. Combined with other factors, this is driving global bond yields higher and creating favorable conditions for EURUSD bears.
The US dollar is once again playing all its trump cards. The greenback is benefiting from its status as a safe-haven asset, the fact that the United States is a net energy exporter, and its relatively attractive yield. Before Jackson Hole, EURUSD bulls still hoped that the Fed would keep interest rates unchanged through the end of the year. Kevin Warsh’s speech, however, largely put those expectations to rest. The probability of monetary tightening as early as September has jumped to 68%, while the odds of two rate hikes in 2026 have risen to 55%.
Some investors describe the rally in 10-year US Treasury yields to 19-month highs, along with global bond yields reaching their highest levels since 2008, as a debt crisis. Others, by contrast, see it as a positive development for the bond market, which is finally emerging from decades of financial repression. Either way, governments that have grown accustomed to ramping up spending will now have to rein in their appetites and tighten their belts.
According to Barclays, the key driver behind the rise in bond yields is the market’s growing conviction that central-bank interest rates will remain higher over the long term than they are today. Central banks typically refrain from tightening monetary policy when they view an energy price shock as temporary. But when a crisis lasts six months rather than six weeks, waiting becomes increasingly risky. The ECB has already moved toward monetary tightening and remains open to another move in September. Now it is the Fed’s turn.
The euro is also coming under pressure from rising political risks in the euro area and surging gas prices. Natural gas has risen by around 70% since early July and is trading at its highest levels since 2023. The sharp rally in gas futures is prompting investors to draw parallels with 2022, when Europe was hit by an energy crisis and EURUSD plunged below parity.
The euro area’s problems do not end there. In regional elections in Germany, a party with Nazi ideology could gain significant political ground for the first time since World War II. Such a scenario could trigger capital outflows from German assets. At the same time, investors are reducing their exposure to French government debt as growing tensions between parliament and the government over the budget raise the risk of further political turmoil and another prime ministerial resignation.
Overall, the dollar has gained the upper hand on several fronts, while the euro has once again been confronted with its own vulnerabilities. This creates conditions for EURUSD to extend its decline toward 1.1500 and 1.1455. A break below the 1.1570 support level could provide a signal to increase previously established short positions.
