The rally has stretched. The pair’s spread over its 200-day moving average shows a surge of a magnitude not seen since 2017.Press enter or click to view image in full size 
Was it mainly a yield-spread story? Not entirely. While the US10Y–DE10Y differential narrowed as Bund yields rose relative to Treasuries, EUR/USD at one point traded roughly 7% above the level implied by yields alone.
Possible Contributors (Not Ranked):
1. The EU Joint Defense Program and the strong run in European defense equities (with Germany excluding defense spending from its powerful debt brake!)
2. The rumored “Mar-a-Lago Accord”Press enter or click to view image in full size
3. Tighter U.S. immigration policy and stepped-up enforcement, potentially lowering long-run labor supply and potential GDP growth
It’s worth noting that this is occurring as the labor market cools, which may further contribute to the acceleration. For the first time since 2021, unemployed workers have surpassed job openings , a clear sign of significant cooling.
4. Trade uncertainty after larger-than-expected tariffs announced in 1H (“Liberation Day”)
5. A higher probability of a Russia-Ukraine peace framework, echoed by stronger Ukrainian bonds and the UBS Ukraine Reconstruction Index at all-time highs
I track these drivers during uptrends to identify what could fade and trigger a price reversal. In H2, tariff policy has become clearer; immigration policy appears unchanged; the EU defense push continues; public information on the Mar-a-Lago Accord remains limited; and while Russia’s escalations persist, the FX impact on the EUR has been contained so far (barring a direct spillover into NATO territory).
With the US10Y–DE10Y spread continuing to narrow, EUR/USD is now ~2.6% higher than the spread-implied fair value. That doesn’t rule out a short- to medium-term USD bounce, but it does suggest that upside in those bounces may be limited if the same drivers remain dominant.
On policy, I believe that a 50 bps cut in September would likely be more USD-supportive over the medium to long run than 25 bps. This is because the Federal Reserve would be coming to the economy’s aid more quickly. Alternatively, they could implement a 0.25% cut but commit to one more round of cuts than previously expected. The sooner the Fed acts to support the economy, the fewer total cuts it will ultimately need to make. If current inflation is truly transitional as they claim, then they should at least consider a 0.5% cut. Much of the current drag on growth looks policy-driven outside the Fed, limiting how much cuts can help. But a decisive 50 bps step would ultimately prove more constructive for the dollar than a smaller move, in my opinion.
Bottom line: EUR has risen more than yields would suggest. As long as the spread keeps tightening, the fair value rises, but spot has overshot. The gap has narrowed to ~2.6%, which tempers, but doesn’t eliminate, the case for a USD bounce.