Euro: Spikes higher against US Dollar on Treasury buybacks – Danske Bank

EUR/USD: Moderately bullish short term, but vulnerable to reversal.

The Treasury’s larger buyback operations appear to have reduced perceived duration supply in the long-end US bond market, pushing the 10-year yield to 4.64%, around 10 bp below Tuesday’s peak. That weakens the dollar’s yield-support channel and can trigger short-covering in EUR/USD, particularly if the move is interpreted as an attempt to contain long-term US borrowing costs rather than as a signal of stronger US growth.

The initial EUR/USD bias is therefore higher, with the strongest transmission likely through US yields and the broader dollar index rather than through a sudden improvement in euro-area fundamentals. The fact that the yield decline only partly spilled into European markets may reinforce the pair’s near-term upside by widening the relative bond-market impulse in favor of the euro.

However, the move is not unambiguously bearish for the dollar. July FOMC minutes reportedly retained a hawkish risk: several officials viewed further tightening as potentially necessary if inflation fails to decline, while some participants questioned whether financial conditions were restrictive enough. If US front-end yields remain elevated, the long-end rally could flatten the curve without materially removing the dollar’s policy-rate advantage.

For the euro, sticky inflation—headline at 2.9% year over year and core at 2.5%—supports expectations of another ECB hike, but moderating labor-cost growth and Danske Bank’s expectation of only one additional 25-basis-point increase limit the scope for a sustained repricing of the ECB path. With a September hike already priced, further EUR/USD gains would likely require either a continued decline in US yields or a more hawkish-than-expected ECB message.

Trading implications:

the immediate setup favors euro upside and dollar softness, while the medium-term signal is mixed. Monitor US 10-year and front-end yields, the dollar index, the ECB minutes, incoming US labor/inflation data, and whether Treasury buybacks produce sustained demand rather than a one-off positioning shock. A rebound in US yields or confirmation of stronger Fed tightening expectations would be the main invalidation risk for the initial bullish EUR/USD interpretation.