Is this all that the euro is capable of? After bouncing off 1.05, investors were hoping for a full correction of EUR/USD, but the music for the bulls didn't play for long. As MUFG correctly noted, as long as the dollar is supported by high yields on U.S. Treasury bonds, and the Fed's policy depends on data, the retreat in the main currency pair will be short-lived. There's just too much positivity lately coming from the U.S. economy.

The fact that the government hasn't stopped working in October has given a new impetus to the bond market rally. The yield on 10-year bonds has returned above 4.6%, which has put pressure on stock indices and allowed EUR/USD bears to take the initiative.

Dynamics of U.S. Treasury Bond Yields

Since mid-July, the USD index has risen by 6%, and yields on benchmark U.S. debt have increased by 75 bps. The eurozone, with its fragile economy, cannot resist such strength, especially with rising oil prices. Unlike the U.S., Europe is a net importer of black gold. The rally in Brent and WTI is having a negative impact on its economy.

At the same time, there are increasing risks of a resumption of the Fed's monetary tightening cycle. A divergence has emerged between oil prices and inflation expectations, and it is likely to be closed in favor of black gold. The Federal Reserve has repeatedly stated the need to anchor consumer inflation expectations. It is not surprising that FOMC officials continue to talk about the need to raise the federal funds rate. Their hawkish rhetoric is one of the drivers behind the EUR/USD peak.

Dynamics of Oil and Inflation Expectations

In this context, the government's continued work is providing support for the U.S. dollar not only because it dissipates some of the clouds over the economy. If government agencies go on an unscheduled vacation from the end of autumn, data will stop coming in. So wouldn't it be better for the Fed to tighten its monetary policy in November and then take a break? The growing probability of a resumption of the monetary tightening cycle this autumn is already providing support for EUR/USD bears.

However, one should not think that everything is fine in the United States. Yes, Congress on the brink of collapse prevented the shutdown of the U.S. government, but the depletion of household savings, the delayed effects of the Fed rate hike, cooling in the labor market, the resumption of student loan payments, strikes, and rising oil prices are increasing the risks of a recession. If not this year, then early next year. EUR/USD may go for a correction even without the help of the eurozone and China. However, until the U.S. labor market data for September is released, the bulls on the main currency pair are unlikely to achieve much.

Technically, on the EUR/USD daily chart, the bears have played out a pin bar. Moreover, a break below the support at 1.051 in the form of a cluster of pivot levels will increase the risks of continuing the drop to 1.042 and serve as a basis for increasing short positions. On the contrary, a rebound from this level will lead to consolidation of the pair.