Dissecting FX Volatility: Yield Differentials, Fiscal Tensions, and Political Turbulence

How shifting drivers beneath the surface are reshaping the EURUSD outlook

BIG PICTURE:

Before we jump into today’s report, I would strongly encourage you to review the inflation playbook and connected video. We are in a period where inflation risk is greater than recession risk in the US, but the Fed refuses to acknowledge it. This will have drastic implications on rates, FX, and equity markets.

Inflation Isn’t Transitory — It’s the New Macro Order (FREE INFLATION CYCLE PLAYBOOK)

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Dissecting FX Volatility: Yield Differentials, Fiscal Tensions, and Political Turbulence

The EURUSD cross has regained momentum in recent weeks, but the drivers beneath the surface are shifting. What was once a straightforward rates-spread story has become increasingly complicated by fiscal dynamics in Germany and political turbulence in France. At the same time, the market’s focus on the US short end means that relative yield differentials remain the anchor point for direction.

In the sections below, I break down how these forces are interacting, what the charts are telling us, why the usual relationships don’t always hold, and how political and policy developments are shaping the outlook for EURUSD.