For the past six months, oil has been the primary driver of financial markets, but in September, bonds confidently took the reins. Yields on 10- and 30-year Treasuries have breached their highest levels since 2022. The pace of rising rates has become the fastest since the US imposed tariffs in April 2025. And what is most alarming: this is happening in an information vacuum—without fresh inflation and GDP data, without new signals from the Fed, and without the usual frenzy over AI resources. This unexplainable fear is driving EURUSD to a 16-month low.
The debt market is trying to guess at what level the Fed will halt its monetary tightening cycle. The yield on two-year notes has stalled around 4.9%, directly hinting at 3 to 4 additional rate hikes. CME derivatives are pricing in an 85% probability of three tightening steps over the next year, and a 58% chance of four.
Both traders and the bond market want more aggressive action from the Federal Reserve than what is embedded in the regulator’s own projections. This imbalance has delivered the greenback its strongest monthly rally since June. However, inflated expectations are a double-edged sword that could deal a painful blow to the dollar.
The first cold shower for EURUSD bears was a speech by New York Fed President John Williams. He acknowledged that a rate hike by the end of the year “looks appropriate,” but emphasized that the Fed needs time to analyze fresh data, and there is no rush following September’s moves.
The instant reaction was swift: futures slashed the probability of an October hike from 73% to 53%, and EURUSD found its footing and bounced back. Christine Lagarde also played her part, delivering a “dovish” surprise. The ECB President noted that rising bond yields tighten financial conditions on their own, curbing inflation and removing the need for the ECB to act. This very rhetoric had previously pushed the euro down to its May 2025 lows.
Additional support for the European currency came from Brent crude falling below the psychological $100 mark. Investors reacted to data showing a recovery in Middle Eastern exports. According to JP Morgan estimates, supplies have returned to 17.5 million barrels per day (98% of pre-war volumes). Goldman Sachs operates with an even more optimistic figure of 23.3 million barrels (including shadow flows), which perfectly aligns with the 2025 averages.
If the Fed does indeed skip the October hike, it will serve as a solid signal to take profits on EURUSD short positions, even though the 1.13 target was never reached. However, the final word in this standoff will be delivered by the latest US labor market statistics. It is this data that will determine who gains the upper hand in the FOMC: the “hawks” or the centrists.
