USD: Yields stay high, US Dollar response muted
Yesterday’s price action still looks like a market trying to price peace before peace is actually delivered. The 10-year Treasury yield has eased back to roughly 4.47%–4.49%, while WTI has fallen into the high-$80s/low-$90s after reports of a possible framework to restore Strait of Hormuz shipping; those reports were then publicly denied by the US administration, which underlines how quickly markets are trading headlines rather than certainty. That mix has kept risk sentiment supported for now, but it also leaves the move vulnerable to reversal because de-escalation is being priced much faster than it is being confirmed.
WTI over the last three months has been trading around an average of about $97/bbl, which is high enough to keep pressure on headline inflation, near-term inflation expectations and the policy path across the major central banks. On the other hand, a peace deal is no longer cleanly USD-negative: escalation supports the dollar through safe-haven demand and higher energy prices, but even de-escalation can still leave the greenback relatively firm if US growth holds up and the Fed’s path remains intact, as easing is pushed out to Q3 2027.
This is also where the earnings-yield gap, the so-called Fed-model valuation channel, matters in a practical sense. When the risk-free rate rises, equities have to compete more directly with Treasuries for capital, which means either stronger earnings delivery or lower valuation multiples. That competition is no longer theoretical: one month into the conflict, the S&P 500 earnings-yield gap versus the 10-year Treasury was ~(-0.4)%, meaning the nominal Treasury yield slightly exceeded the market earnings yield. In other words, higher oil is tightening US financial conditions partly through valuation pressure on equities, not just through a stronger relative-rate signal.
And that helps explain why this still is not 2022. Back then, oil also spent months above $100/bbl, the 10-year Treasury yield rose sharply over the course of the year, and the dollar rallied aggressively, around 20% low to peak through 2022. This time, yields are again rising, but the dollar response has been much more muted. The difference is that the current oil shock is transmitting more through term premia and cross-asset financial conditions than through a uniquely stronger US front-end rate advantage. That means some of the adjustment is happening via equity valuation compression, foreign-rate repricing and increased hedging, while a residual US policy-risk premium still caps upside at the margin. The upshot is a market where fixed income remains highly sensitive to oil, equities become more vulnerable as yields push deeper into the 4.5%–5.0% zone, and the dollar stays supported with a relatively muted response against historically high-nominal yields.
EUR: Between rates and conflicting geopolitics
As markets grow increasingly numb to the contradictions surrounding US–Iran peace negotiations, EUR/USD has begun to move less in tandem with shifts in sentiment and may start to refocus on rate differentials.
The pair declined sharply from the 1.18 area in early May, as hawkish Fed repricing coincided with a partial unwinding of markets more entrenched hawkish bias for the ECB. Markets currently price around 15bp of hikes for the Fed and 60bp for the ECB by year-end – the relative adjustment now appears more balanced, and EUR/USD price action has correspondingly slowed.
The pair has since hovered near the 1.16 lows, lacking a clear bearish catalyst to break lower, while also showing limited conviction to reclaim key moving averages, below which it currently sits.
Focus now turns to inflation releases today and tomorrow, with eurozone prints alongside the US PCE deflator due. A renewed test of 1.16 would appear warranted if inflation pressures skew more to the upside in the US and there are no meaningful developments around Hormuz. Christopher Waller’s recent hawkish remarks – unusual for one of the more dovish FOMC members – received limited attention initially but could re-gain investor focus if inflation surprises on the upside, weighing on EUR/USD more forcefully.
GBP: Fading resilience into month-end
Sterling has come under renewed pressure today, with GBP/USD drifting back from recent highs and GBP/EUR struggling to sustain gains near 1.16, as a more challenging mix of domestic and external drivers reasserts itself.
While the pound had been one of the better-performing G10 currencies versus the dollar since last week – supported by Andy Burnham’s commitment to fiscal discipline and softer USD dynamics linked to tentative Iran deal optimism – that support is starting to fade. The stalling of US–Iran negotiations is proving key: the longer the impasse persists, the greater the risk of renewed USD haven demand and a further hawkish repricing of Fed expectations, both weighing on GBP/USD. This is increasingly reflected in rates, with the UK–US 2-year yield spread narrowing, pointing to downside pressure.
Domestic risks are also resurfacing. The upcoming by-election threatens to trigger a prolonged leadership contest, keeping investors cautious. Options markets reinforce this shift, with 25-delta risk reversals negatively skewed across tenors, signalling growing demand for GBP downside protection.
Technically, momentum is fading. GBP/USD remains supported above 1.33, but upside looks capped toward 1.35–1.36, while GBP/EUR’s failure to clear 1.16 reinforces the range-bound but fragile tone.
Overall, GBP looks increasingly vulnerable, with near-term resilience giving way to a more fragile, risk-sensitive profile.
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Calendar: May 25-29
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
