The FX Trader: USD firms again. What can stop it?

The latest

US dollar follows through higher in second surge of post-FOMC meeting strength. Looking for catalysts for this move, the higher front-end yields in the US (pricing more FOMC hikes) is a traditional fundamental driver of USD strength here. The Euro-US 2-year yield spread is dipping to the lowest levels since July as it has headed below -150 basis points. In the case of UK-US yields, after the recent relative BoE dovishness, the 2-year spread there is pushing to match its lowest levels since early July and all the way back to early 2025, and yet EURGBP is relatively stable. An additional EUR-negative factor is the focus on the Germany-France 10-year yield spread, which has ballooned wider to its highest levels since the 2010-12 Eurozone sovereign debt crisis, peaking Friday and again Tuesday around 105 basis points – a full 17 basis points beyond the prior post-crisis highs. Likewise, while the market has dramatically re-priced the forward rate path for the Bank of Japan and Japan’s front-end yields are at their highest in over 30 years, the rise in short-dated US yields has outpaced of late and the spread there is at the high of the year.

Elsewhere, can’t help but note that the recent surge in US AI-adjacent stocks and evidence of record net inflows into US equities are possible additional drivers of USD strength. Still, gauging the further potential for additional USD strength from here, it is a struggle to see how the market prices in significantly more from the Fed than it already has for next year. As for longer US yields, should the 10-year treasury yield shake loose and rise rapidly above the 5.00% level this could become a destabilizing force across markets, possibly driving an brief additional spurt higher in the USD before reversing.

Key takeaways and what to watch for from here: The US dollar is trending and there is little to suggest traders should stand in the way of developments here as we may be set for a test of the cycle highs in the broader US dollar in the days ahead and possibly then some, as we are less than a percent from the major range low in EURUSD, for example. Long ago we noted that 1.1200-1.1250 is a critical zone for EURUSD in the very big picture and we have yet to test that level – the current backdrop suggests rising odds of this zone coming into view (see chart below). As well, watching the USDJPY situation closely as the 158.50 area looks like the last gasp resistance ahead of 160.00 and higher.

 Again, note that a further rush higher in US treasury yields and/or the European sovereign yield spread could become aggravating factors for volatility and for a larger spike lower in EURUSD. An additional negative Europe/UK wildcard is the situation in the Middle East and whether the Trump administration chooses to embargo or limit fuel and especially diesel exports to contain price pressures in the US ahead of the mid-term elections. Such a move could have severe consequences for Europe, which has become far more reliant on US diesel imports (some half a million barrels per day, or roughly 10% of daily demand) since the Iran war cut off some Middle East supplies.

Chart focus: EURUSD weekly
EURUSD is descending into the last bit of the range and toward the low of the year near 1.1325. Already early this year after the spike high to 1.2081 we gauged that a key structural support in the long-term picture for the rally off the “Liberation Day” lows of April 2025 was the 1.1200-1.1250 area – the former top of the range. We never quite got there with the subsequent sell-offs, but the current picture suggests a risk of this area coming into play if the lows for the year are broken. Below that, we would have to pull in some deeper Fibonacci retracements – with the last gasp below the psychological 1.1000 area at around 1.0880 – that looks a bit far off at present.