Comments from New York Fed President John Williams and softer Fed-hike probabilities eased dollar strength, giving EUR/USD room to recover after a bond-driven selloff pushed the pair to a 16-month low.
John Williams’ comment that the Fed does not need an immediate rate hike cut October hike odds and allowed EUR/USD to rebound.
A rapid rise in US Treasury yields had driven the dollar higher and pushed EUR/USD to a 16-month low before the pullback.
Christine Lagarde’s dovish remarks and a fall in Brent crude below $100 pressured the euro, but oil supply improvements provided some relief.
A surge in US Treasury yields earlier in September drove the dollar higher and pushed EUR/USD to its lowest level since May 2025. Market expectations for additional Fed tightening climbed, with two-year Treasury yields implying multiple further hikes. That dynamic reversed after New York Fed President John Williams said the Fed did not need to raise rates immediately, which sharply reduced the probability of an October rate hike and allowed EUR/USD to recover.
Bonds led the recent move. Yields on 10- and 30-year US Treasuries reached their highest levels since 2022 and rose at the fastest monthly pace seen in over a year. The market was trying to price where the federal funds rate will land once the tightening cycle ends. Futures and Treasury yields signaled expectations of three to four more hikes over the next year, supporting a stronger dollar.
Williams' comments changed that calculus. He said the Fed may need more time to assess incoming data before further tightening. As a result, derivatives traders cut the odds of an October hike significantly, and the dollar eased.
Fed's path. Strong jobs and wage data would push the balance toward hawkish Fed members and could reverse the pullback. Weaker-than-expected labor data would support the current reduction in hike odds and further dollar weakness.
The dollar's strength this month was driven by a fast rise in bond yields and higher-than-expected Fed-tightening expectations. Williams' comment that an immediate hike is unnecessary took some of that pressure off the dollar and allowed EUR/USD to rebound. Traders should watch incoming US labor data closely and be prepared to lock in profits on short EUR/USD positions if the Fed pauses in October.
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