Since mid-September, U.S. long-term rates have risen by more than 70 basis points, a movement that has taken financial markets by surprise. The probability that markets assigned to such a rapid rise in U.S. long-term rates was then estimated at less than 5%.
This is even more striking given that, during the same period, the Federal Reserve lowered the federal funds target twice, by a total of 75 basis points, bringing its target from 5.25-5.50% in mid-September to 4.50-4.75% on November 7. This increase in long-term rates reflects growing market doubts about the future path of U.S. short-term rates amid a context of solid growth, widening public deficit, and proposed higher tariffs, which are inherently inflationary.
Between September 16 and November 7, short-term rate expectations for 2026 rose from 2.75% to 3.50%. A considerable shock.
Conversely, during the same period, Eurozone long-term rates continued to decline on long term tenors.
The European economic situation remains sluggish, and the likely shift in U.S. economic policy does improve activity prospects in Europe. The ECB should therefore be able to continue its rate cuts, except in the event of an external inflationary shock or difficulty in significantly decoupling its monetary policy from that of the United States.
This current interest rate decoupling benefits the dollar in the spot foreign exchange market, with EURUSD moving from 1.11 to 1.0650 over the period. In the forward markets, however, the USD has weakened against the euro due to the widening interest rate differential. At a 10-year horizon, the forward rate has moved from 1.235 to 1.265 as the interest rate spread has widened significantly since mid-September, more than offsetting the strengthening of the dollar against the euro in the spot market.
Although rare historically, this decoupling could persist in the coming months or even intensify if the economic cycles on both sides of the Atlantic continue to diverge.
