FX.co ★ EUR/USD to continue decline until U.S. securities market situation changes

A strong economy means a strong currency. This principle of fundamental analysis is reflected through the bond market. The resilience of the American economy to aggressive rate hikes by the Federal Reserve leads to faster growth in yields of U.S. Treasury bonds compared to global counterparts. As a result, the appeal of U.S. denominated assets grows, accelerating the influx of capital into ETFs focused on them and contributing to the decline in EUR/USD.

According to a Bank of America study citing EPFR Global data, investors have poured $127 billion into specialized exchange-traded funds with Treasury bonds as the underlying asset since the beginning of 2023. Meanwhile, the yield on 10-year bonds has reached a 15-year high, and the net long positions of asset managers on U.S. debt futures have set a new record.

The minutes of the FOMC's July meeting accelerated the rally in U.S. bond yields. Although two officials were willing to extend the June pause, most were concerned about inflation and intended to continue raising rates. One can speak of a "hawkish" surprise from the Fed, as investors previously speculated about the duration of maintaining borrowing costs at a plateau. Now, they need to keep in mind the risks of their growth to 5.75%.

Just as the Federal Reserve leads other central banks, Treasury bonds beckon counterparts from other countries. As a result, the yield on the global bond market has reached 3.3%, the highest level since 2008.

Dynamics of global debt market yields

Investors are beginning to doubt that the cycles of monetary policy tightening by the world's leading central banks have reached their end, specially against the backdrop of accelerating average wages and inflation in Britain, which allowed the futures market to raise the assumed ceiling of the Bank of England's repo rate from 5.75% to 6%.

The Fed and other central banks face a serious problem. Consumer prices are slowing faster than they thought, and economic growth is stronger than forecasts anticipate. Theoretically, strong labor markets and economies increase the risks of rekindling inflation. Therefore, the Federal Reserve must keep a finger on the pulse. It does not want to repeat the mistakes of its predecessors. In the 1970s, the Fed prematurely declared victory over high prices and was punished with a double-dip recession.

As long as the U.S. securities market's environment of falling stock indices and rising bond yields does not change, "bulls" in EUR/USD have little hope. Their successes will be of a local nature.

Technically, on the daily chart of the main currency pair, there are attempts by buyers to return EUR/USD within the fair value range of 1.0885-1.1125. Even if they succeed, the sentiment remains bearish. Traders should sell euros on the rebound from resistances at $1.095 and $1.0975.