The euro and sterling have each fallen about 0.9% against the US dollar since 13 May. The moves have been linked to shifts in oil and gas prices and to changes in bond yields.
US Treasury yields have risen faster than government bond yields in the eurozone. At the same time, market pricing for the European Central Bank has been more stable, which has widened the yield gap and added short-term pressure on the euro against the dollar.
Shifting Monetary Policy Expectations
Market expectations for US monetary policy have also changed. The market no longer expects the Federal Reserve to cut interest rates this year or next, and pricing shows 18 basis points for a possible rate increase by the end of the year.
Developments in the Middle East have continued to affect energy markets and, in turn, the bond market and monetary policy outlook. These factors have contributed to the recent weakness in both the euro and sterling versus the dollar.
Looking back to this time in 2025, we saw the Euro take a hit as US bond yields outpaced those in the Eurozone. The market was even starting to price in a Federal Reserve rate hike while the European Central Bank’s outlook remained stable. This divergence, fueled by energy price concerns, created significant downward pressure on the EUR/USD pair.
Today, that yield spread remains a dominant theme, though the context is shifting. The US 10-year Treasury is yielding around 4.6% while the German 10-year Bund sits near 2.7%, keeping the dollar attractive. However, with the EUR/USD trading near 1.07, we see signs that the aggressive dollar strengthening from last year may be losing steam.
Trading Implications For Eurusd
The latest inflation data makes this dynamic particularly interesting for the coming weeks. While US CPI has cooled slightly to 3.1%, the Eurozone’s HICP inflation remains stubborn at 2.8%, prompting more hawkish commentary from ECB officials. This is a notable change from the more passive stance we observed last year and suggests the policy divergence may be set to narrow.
For those trading options, this could be a moment to consider buying EUR/USD call options with strikes around the 1.09 level for the next quarter. If the market begins to price in a more aggressive ECB relative to the Fed, these positions offer a leveraged way to profit from a Euro recovery. Implied volatility remains moderate, making entry costs on such strategies relatively attractive right now.
We should also watch for opportunities in rate futures to trade the bond yield spread itself. A strategy involving going long German Bund futures while simultaneously shorting US 10-Year T-Note futures would benefit if Eurozone yields fall slower or rise faster than their US counterparts. This directly plays the theme of a narrowing policy gap between the two central banks.
Historically, we saw a similar powerful trend in 2014-2015 when ECB easing diverged sharply from Fed tightening, leading to a massive move in the Euro. The current setup suggests we may be at an inflection point for the reverse of the trend we saw begin in 2025. Monitoring central bank speeches over the next few weeks will be critical to timing these positions correctly.
