No matter how long the rope twists, the end is always the same. No matter how much EUR/USD falls, it will inevitably rise at some point. Such is the reality of Forex—every factor other than monetary policy has only a temporary effect on currency prices. Whether it's the specter of a debt crisis or a court ruling on the illegality of White House tariffs. The fate of the main currency pair is decided by central banks, no matter how much Donald Trump might want to interfere.

According to Morgan Stanley's updated forecast, the Federal Reserve will cut the federal funds rate in September, and then once every quarter. As a result, by the end of 2026, the borrowing cost will drop to 2.75–3%. The risk to this estimate lies in overly strong August labor market data—around +225k jobs or more. In that case, monetary easing will not resume. Conversely, a rapid cooling in the labor market would push terminal rates even lower.

Credit Agricole believes that next year the European Central Bank will begin tightening monetary policy thanks to improved growth prospects, a strong labor market, and rising chances of accelerating inflation. By September, the deposit rate will increase by 75 basis points to 2.75%. This will place it at roughly the same level as the federal funds rate. A narrowing yield differential between US and German bonds is a strong argument in favor of a continued EUR/USD rally toward 1.25, if not 1.3.

Yield spread dynamics between French and German bonds

The current correction in the main currency pair is due to faster sell-offs in the European debt market than in the US. The growing likelihood of snap elections in France, doubts that Rachel Reeves can plug the UK budget hole without slowing GDP growth, and concerns over the German budget due to increased defense spending and fiscal stimulus have triggered turmoil in the EU.

But in fact, it's no more serious than foreign investors' unwillingness to finance the US budget deficit. The Federal Appeals Court's verdict on tariffs means they'll have to be returned. Where will the money come from to finance Donald Trump's "big and beautiful" tax cut bill? There's only one way—bond issuance. Non-residents are demanding higher yields, which has expanded the spread between 30- and 5-year Treasuries to the highest levels since 2001.

I believe the markets will soon regain their composure and return to focusing on monetary policy—especially with the upcoming US August employment statistics on the horizon.

Technically, on the daily EUR/USD chart, an intense battle persists for fair value at 1.165. Attempts to break out of both the upper and lower boundaries of the 1.160–1.175 consolidation range have failed. Only a breakthrough beyond this range will signal the euro's next direction.