EUR/USD Downside Risks in a Bearish Bond Market: Assessing the Impact of 10-Year Treasury Yields at 5.0%

Gauging EUR/USD downside risks in a bearish bond market

We estimate that further US bond weakness and 10-year Treasury yields hitting 5.0% would bring EUR/USD to the 1.02 area. While near-term upside risks to back-end yields are non-negligible, short-term USD swap rates should be more capped given a smaller pricing/dot plot gap compared to last June. Our medium-term baseline remains bullish for EUR/USD.

 

10Y Treasuries at 5% can bring EUR/USD to 1.02

Our colleagues in rates strategy argued in this piece that 5.0% 10-year US yields are no longer a remote possibility. The higher-for-longer Federal Reserve narrative that has been supporting the dollar recently has been mirrored in higher treasury yields, and the implications for the FX market are tangible.

We simulated a scenario where the 10-year Treasuries hit 5.0%, based on the past year of EUR/USD coefficients. We estimate the pair would be trading around 1.02 with 5.0% 10Y yields.

That would be an approximate 3.5% drop from current levels, the same kind of depreciation observed in the period when UST 10Y yields rose from 4.0% to the current 4.50% levels (EUR/USD sliding from 1.10 to 1.06).

 

EUR/USD and Treasury yields

Dashed lines are ING estimations in a 5.0% UST 10Y scenario

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