EUR/USD Tumbles as Fed Decision Looms Amid Rising Treasury Yields

The EUR/USD pair has been trading near its one-month low as rising US Treasury yields support the US Dollar. Despite this, the pair lacks strong follow-through selling ahead of the Federal Reserve's monetary policy announcement on Wednesday.

The US Treasury yields have climbed to fresh multi-year highs across the curve, with the benchmark 10-year yield reaching 5.04%, its highest level since 2007. This has been driven by the energy shock stemming from the war in the Middle East and rising oil prices, which are adding to inflationary pressures.

The European Central Bank has already raised interest rates twice this year, taking the deposit facility rate to 2.50%, and has signalled openness to additional tightening. Markets are widely expecting the Fed to deliver its first rate hike since 2023 as the energy shock has stalled the disinflation trend, keeping inflation above the central bank's 2% target.

According to the CME FedWatch Tool, traders price in around a 92% chance of a 25-basis-point increase on Wednesday. A quarter-point increase is largely priced in, but a surprise hold could trigger a sharp pullback in the US Dollar and Treasury yields, allowing EUR/USD to extend its rebound.